The new era ushered in by the federal government's takeover of the government-sponsored enterprises on Sept. 8 of this year will have short-term effects for Fannie Mae and Freddie Mac that are relatively predictable, but long-term ones that have yet to become evident.
It certainly is possible that we may see a whole new emergence of 1960s and 1970s-style portfolio lending. After about a decade in the proverbial closet, the Federal Housing Administration (FHA) is once again basking in the sunny glow of mission-critical lending prominence. However, mortgage banks and depository institutions that once shunned FHA are faced with the necessity of getting into FHA lending.
For many, that's an intimidating prospect. What are the realities of starting up an FHA operation these days, and how does one go about it?
First of all, timing is everything. Companies that saw the writing on the wall as much as a year ago made the move early toward getting their FHA approval. Many were Department of Housing and Urban Development (HUD) Non-Supervised or Supervised Mortgagees without Direct Endorsement authority, which means they had a thorough knowledge of FHA but were unable to approve their own loans.
Having to rely upon the underwriting facilities of others meant being limited in terms of response time, with accompanying impact on service levels to borrowers.
Others were completely unfamiliar with FHA, so they had to start from scratch on the path to becoming an HUD approved mortgagee and Direct Endorsement lender, able to underwrite and approve loans on behalf of FHA. The early birds had a decided advantage: HUD reportedly has over 3,000 approval applications in its backlog. Whatever your HUD experience may be, there are a number of realities about which every FHA-bound lender should be aware.
Get the right lawyer
Finding someone who knows his way around the FHA approval process isn't just a ‘nice to have’ – it's a real necessity. The various documents meant to guide you to approval are sometimes superseded by other documents that are more current, and that can lead to confusion on the part of a newcomer. The right law firm can save immeasurable amounts of time and effort.
‘Among the biggest challenges to getting an FHA application done is crossing the T's and dotting the I's,’ says Stacy Riggin, a licensing specialist with K&L Gates LLP, Washington, D.C. ‘HUD sets forth the criteria for getting approved, but doesn't provide a lot of detail. For example, they ask for a floorplan and a photo of your facility. What they don't tell you is that they also want a photo of your signage and your company name on the building directory. There are many similar details in the course of the application process.’
The right law firm knows how to get the job done in any situation. HUD has tried hard to keep current, but it is not always safe to assume anything when it comes to their published materials.
As Riggin notes, ‘The current handbook for mortgagee approval is dated 2006 – the previous one was from 1993. It helps to know the handbooks upside down and backwards to save a great deal of effort.’
HUD has done a good job on its Web site at providing a thorough overview of requirements for newcomers. A good checklist is available on the site, for example, along with other helpful documents.
This is a test
Someone has to have the responsibility of seeing the process through from beginning to end. That person will work with the attorneys, execute on the required steps, find the right people to staff the department and oversee the creation of the material and process HUD demands. It is a crucial job, and it needs to be a senior, highly experienced executive who doesn't mind getting ‘down in the weeds.’
This senior executive will also need to keep abreast of HUD's review of test cases submitted for review and approval. The test cases are all-important, as they are the measurement HUD uses to decide if a lender is ready for approval. And don't be confused by the name – these ‘test’ cases are real loans, not hypotheticals, and at least 15 test cases must be submitted within a year of the initial application to one of HUD's Home Ownership Centers (HOCs), which are located in Atlanta, Philadelphia, Denver and Santa Ana, Calif.
Also, be aware that only five of the test cases can be run through an automated underwriting system like Desktop Underwriting – the other 10 have to be underwritten manually. To do otherwise risks HUD rejection or delays in getting the conditional commitment.
After receiving the commitment, you can close the loan and submit it to HUD for your mortgage insurance certificate (MIC). The MIC is evidence of insurance, and without it, the loan is merely a high loan-to-value uninsured conventional loan and will ultimately end up as a repurchase with a significantly impaired value.
When all your test cases are approved and completed, you receive notification of your formal FHA Direct Endorsement underwriting approval and you are on probation for the next year. You still must send in each completed and closed loan to HUD for review, and if HUD finds the case in proper order, then you will receive the MIC.
If HUD finds a defect, then it must be repaired, or in the case of an unfixable deficiency, the loan will not receive FHA insurance and will result in a repurchase from the investor. After two years of satisfactory experience, you can issue your own MICs, and that is a tremendous time-saver.
Time is the enemy at the moment – things are very busy in the individual HOCs, and it can take two to three weeks just for HUD to review the case. HUD has a good online system to allow you to check status, but it points out the importance of getting the file ‘right and tight’ prior to closing to avoid logjams.
Find the right people
For those who started early in this process, it should not have been difficult to locate senior, highly experienced national underwriting managers. Experience in the industry is, of course, paramount, and enables the underwriting manager to deal with the various HOCs around the country, as well as hire and train other underwriters and processors with less experience.
Speaking of hiring, the word in the industry is that all the experienced FHA people are taken. That is not necessarily the case and may be somewhat of an urban legend.
In the Midwest, which has always been a strong area for FHA lending, you are likely to find more people with experience. Of course, it may be more difficult in the Western states or in other areas where FHA has been less of a factor, historically.
Devil in the details
It also needs to be stressed that there are lots of details – some major, some minor – but all of them have the potential for problems.
For example, you need to make sure your loan origination software (LOS) supports FHA lending. Not all of them do, since it has been some time since FHA was a standard product out there. A good LOS can take on another role as well – as a training aid. Workflows and form creation capabilities can help get your people up to speed by letting them work hands-on with theoretical borrowers, easing them into the FHA way of doing things.
When doing your test cases, what do you do if the wait at FHA endangers a closing? Remember, these are real loans with real borrowers who won't want to miss a closing date because you can't get loan approval quickly enough. You might well face the choice of funding the loan before approval in order to save the deal, but you run the risk of having the loan rejected at HUD, which would result in a repurchase or unsalable loan. You need to understand all the risks and weigh them carefully.
Strategically, you'll need to think down the road and plan for things like Ginnie Mae approval. This is not a trivial commitment, but the rewards can be substantial (e.g., freedom from the dictates of the secondary marketing mainstream that may be in and out of the market when you require greater consistency). Becoming a Ginnie Mae issuer brings a new set of challenges, but it also offers many opportunities for growth.
Establishing an FHA division may, at first, look to be a monumental task. For some it may be. But it is certainly doable, especially if you know what to expect and follow a basic roadmap during its creation.
One thing is certain in this uncertain world – FHA has become a vital channel for mortgage origination and will continue to be so for a long while.
Steve Jacobson is CEO and Dan Cutaia is president and chief operating officer of Fairway Independent Mortgage, based in Sun Prairie, Wis. They can be reached at (608) 837-4800.