[ad_1] Few things terrify lenders more than the arrival of a manila envelope from the Department of Housing and Urban Development (HUD) containing a redlining allegation. In recent months, HUD investigators have made redlining cases a departmental priority, according to interviews with attorneys who have reviewed the complaints, and lenders who declined to comment on the practices for fear of being associated with redlining. Typically, a redlining allegation begins with a comparative analysis of a lender’s performance in relation to its peers in low to moderate income census tracts and majority-minority neighborhoods. But HUD has adjusted its approach — it is now comparing a lender’s performance in different areas against itself. A higher rate of withdrawn applications in certain tracts compared to the larger metropolitan area could result in a redlining allegation by HUD. Independent mortgage banks have been “completely blindsided” by the increase in enforcement activity, said Daniella Casseres, who leads the mortgage regulatory practice group at law firm Mitchell Sander. Redlining “is not even on the radar of their board or senior management,” she said. Being labeled a redliner can cause lasting reputational damage because of its association with the historic definition of redlining, which federal policy supported for decades. As some independent mortgage banks have found out, a modern-day redlining allegation does not need to prove intentionality. HUD complaints allege redlining based on disparate impact to borrowers on the basis of race or ethnicity, which is prohibited under the Fair Housing Act. A spokesperson for HUD said the agency could not discuss investigations or strategy of fair lending enforcement, but said that fair lending is a priority of the Biden-Harris Administration and HUD. “HUD’s work co-leading the Interagency Task Force on Property Appraisal and Valuation Equity (PAVE), as well as the number of actions taken in the first year of the administration to bolster enforcement of the Fair Housing Act demonstrates our commitment to the issue,” a spokesperson said. Increased redlining enforcement is one piece of HUD’s renewed focus on fair lending, and part of a multi-pronged approach to address the legacy of racist housing policy. HUD said it has already taken concrete steps toward that goal. It has begun to restore HUD’s discriminatory effects standard and requested a 17% budget increase for the Office of Fair Housing and Equal Opportunity for enforcement. In August, HUD Secretary Marcia Fudge signed an agreement with the Federal Housing Finance Agency to strengthen fair lending enforcement. HUD ended 40 years of ambiguity on a statute meant to spur lenders to target lending programs to benefit protected classes. But HUD and the Federal Housing Administration have also struggled to navigate challenges posed by COVID-19 and correct long-standing deficiencies. Part of its effort to modernize its outdated technology systems, the FHA Catalyst program, hit a snag last year. FHA has had gaps in loss-mitigation oversight of servicers it approved. And although Fudge has repeatedly vowed to bring banks back to FHA, recent policy moves could drive them away. Premium product In California’s Contra Costa County, where the median home listing price is now $749,000, a loan officer priced a loan for a potential borrower with less-than-perfect credit, who had found a listing for $650,000. For a borrower with tarnished credit and thus unable to get conventional financing, an FHA-insured mortgage is the go-to choice. But with a down payment of less than 10%, the borrower would have had to pay an additional $11,375 in upfront fees to FHA, due to FHA’s 175 basis point mortgage insurance premium, which it charges on nearly all loans. John Meussner, the loan originator who priced the loan, said the fees amounted to “gouging.” In addition to upfront fees, FHA charges fees for the life of the loan. For a 10% down payment, a hypothetical FHA borrower with a $650,000 base loan amount would pay an additional $568 per month in mortgage insurance premium. The recurring monthly fee leads some borrowers to refinance out of their FHA loan, since unlike in the conventional market, there’s no getting rid of it. By comparison, private mortgage insurance cancels at a 78% loan-to-value ratio. “If FHA and HUD want to serve their purpose of assisting low-moderate income customers and increase home ownership, the best place to start would be to stop ripping off the very people they’re attempting to serve,” said Meussner, of Mason-McDuffie Mortgage. The share of FHA-backed mortgages made to Black and Hispanic borrowers are more than twice that of the rest of the market, public data shows. Four in five FHA purchase mortgages went to first-time homebuyers in 2021. FHA’s mortgage insurance premium earnings helped propel the Mutual Mortgage Insurance fund’s capital ratio to 8.03% in 2021, four times the statutory minimum. The estimated value of monthly insurance premiums through the life of the loan as of last year was $49 billion, according to HUD’s annual report to Congress. In light of the stellar mutual mortgage insurance fund report, some stakeholders expected FHA to reduce mortgage insurance premiums. Many have called for reductions. The executive director of one state housing finance agency said a small reduction is “probably warranted” based on the health of the fund. But the official, who requested anonymity to speak openly about the department, also said he understands FHA’s cautious approach, since FHA officials may still recall the years that followed the housing crisis, when the fund fell below the required ratio. Lopa Kolluri, principal deputy assistant secretary of FHA, said in an interview that FHA would reassess whether to lower premiums closer to the end of the first quarter. In terms of making a decision on lowering mortgage insurance premiums, she said it depends on the share of seriously delinquent borrowers. “We’re encouraged by the serious delinquency rate decreasing, but it’s too early to make predictions,” said Kolluri. “We believe we’ll have a better indication of performance later in the calendar of this first quarter.” But former officials and stakeholders defend FHA despite the steep fees, because it fills a need
