The Federal Housing Administration recently announced an alteration in the way that loan defects will be classified by the government. The overall goal of making these changes is to more accurately assess the severity of errors in the underwriting process. Right now, the federal agency uses 99 separate codes to categorize underwriting mistakes, but the goal is to consolidate these categories nine primary defects.
Some of these defects include borrower income, borrower assets, and loan-to-value amount. These data are all collected in order to learn what trends are happening in the lending industry with regard to mistakes. While having 99 separate categories does help to provide specific information about various mistakes, it also doesn’t provide the picture of the scope of errors in underwriting. Since it is too voluminous to draw accurate information from, the goal is to condense all of these various categories into a fewer number for the purposes of making review much easier.
While it will certainly make the process easier, it also has benefits for the Federal Housing Administration and how they carry out their mission. Underwriting issues that lead to mistakes could generate enforcement actions, so it’s valuable to have accurate information any time that an error is alleged.
There is another positive aspect to the changes with regard to exploring underwriting errors. When errors are made, homeowners may be the ones who pay the price, especially if they are denied a loan as a result of a mistake in their paperwork for processing. One of the primary concerns at the government level is the fact that despite lending standards that have been loosened as of late, some individuals simply don’t have access to the home buying market quite yet.
The bulk of the concern related to inability to buy a home has to do with millennials, many of whom would be first-time home buyers. As a result of the credit crunch and other issues related to the housing market, this generation has had more difficulty in being able to afford homes and make that first purchase. Understanding how errors impact the ability to purchase a home could shed light on better ways to do business so that this younger generation and other first-time home-buyers are able to move forward with their transactions.
Federal housing administration representatives believe that this new approach to categorizing errors will help improve their relationships with lenders and home-buyers. Part of this is the perception that a greater focus on reducing errors will give lenders more confidence to interact with the agency as a whole, in combination with the fact that the agency hopes to be able to provide loans to new homeowners in the future as well.
Recently, a number of large lending companies have pulled back the relationship with the FHA amidst claims of noncompliant loans. The agency hopes that the changes being made currently will have positive implications for the entire housing market.