THE BASIS POINT

FHA After Banks For Bad Loans. Rates Remain Low.

Banks are sitting on huge amounts of cash. The reasons for this include reserves held for bad loans, the inability to find credit-worthy lending outlets, and the continued threat of mortgage buybacks by government agencies. American Banker reports that loan repurchase requests from Fannie Mae and Freddie Mac are finally tapering off but that the FHA is stepping in to take up the slack.

“In recent months the government agency has been denying claims and threatening lawsuits in unprecedented volume…the agency increasingly is forcing lenders to bear the risk on new loans with technical defects such as having a borrower’s previous address listed incorrectly in a loan file. ‘HUD is acting like any insurance agency, if a loan goes bad and there is some deficiency, they are not going to pay the claim,'” said one source.

According to the article, “FHA officials have blamed the decline on delays in the foreclosure process, and said their inventory of loans in foreclosure is at a historic high of nearly 176,000 loans.” HUD can bring criminal charges against executives responsible for overseeing compliance with FHA rules – don’t do the crime if you can’t do the time. If a lender falsely certifies that loans have satisfied FHA’s requirements, it can be penalized for up to three times the amount of any FHA insurance claim. HUD typically does not review loan files before closing and instead relies on the certification from lenders that the loan is in compliance with rules and requirements – similar to what investors do with lender clients.

Which way are rates going?
Are any loan agents complaining about rates? And mortgage company owners continue to ask low-producing agents: “If you can’t originate loans with rates down here, do you really expect to originate them if & when rates move higher?”

The economy is best described as sputtering along, grinding higher in some areas but lagging in others.

Just look at a few of the headlines late last week:

Consumer Sentiment Rises in May
Pending Home Sales Slump 11.6% in April
Consumer Spending Loses Momentum in April (“Spending rose by the smallest gain in three months during April, government data showed Friday, in a further sign of erosion in spending momentum due to higher prices at the gas pump. Consumers’ spending rose 0.4% last month, the Commerce Department estimated. Meanwhile, personal incomes rose 0.4% in April. Income has risen for seven straight months.)

So rates may just chop around these broad levels for quite some time.