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RISMEDIA, June 21, 2010—The U.S. Department of Housing and Urban Development has finalized regulations that will have a significant impact on small- or medium-sized lenders’ ability to participate in the Federal Housing Administration’s mortgage insurance programs. But, what does this mean for real estate brokers? If you own an interest in an affiliated mortgage company that is approved to originate FHA-insured loans, these regulations could change the way your affiliated business operates.

As part of HUD’s campaign to manage risk, the Department’s regulations make two significant changes to the FHA program:
-The elimination of FHA-approved loan correspondents
-The increase in required minimum net worth for FHA-approved mortgagees

Notably, as of May 20, 2010, HUD will no longer approve new applications for loan correspondents, and all loan correspondent approvals obtained before this date will expire on December 31, 2010. HUD also has increased the minimum net worth required for all FHA-approved mortgage companies from $250,000 to up to $2.5 million. By May 20, 2011, all FHA-approved mortgagees must have at least $1 million in net worth. (FHA-approved mortgagees that qualify as small businesses must have $500,000 in net worth). By May 20, 2013, this net worth requirement will increase, based on a complicated formula, up to a maximum of $2.5 million.

These changes, therefore, will affect a real estate broker’s affiliated mortgage company, depending on the type of FHA approval currently held—a loan correspondent approval or a mortgagee approval. If an affiliated mortgage company is an FHA-approved loan correspondent, the new regulations will have fewer effects on the mortgage company’s ability to originate FHA-insured loans. As of December 31, 2010, these entities will no longer have FHA approval and will no longer be required to submit annual audited financial statements to HUD. Yet, these affiliated companies may still broker FHA-insured mortgage loans to FHA-approved mortgagees as third-party originators. The FHA-approved mortgagee must choose to sponsor the third-party originator, and the FHA-approved mortgagee will become fully responsible for all aspects of the mortgage loans. The third-party originator, however, will not be permitted to close FHA-insured loans in its name. This change could impact the state licenses currently held by a real estate broker’s affiliated entities.

On the other hand, if an affiliated mortgage company is an FHA-approved mortgagee, this company must increase its net worth to $1 million in one year and up to a maximum of $2.5 million in three years. Thus, as of May 20, 2011, these entities have two choices:
1. Increase their net worth to maintain their status as FHA-approved mortgagees, or
2. Relinquish their FHA approvals and participate in the FHA program as third-party originators.

Both options present their challenges. However, if a mortgagee is unable to raise the additional net worth to maintain approval or chooses to relinquish its FHA-approved status, real estate brokers should be aware of certain important consequences.

First, these affiliated entities will be required to broker their FHA loan applications to FHA-approved mortgagees as third-party originators.

Second, the brokering of FHA loans as a third-party originator means that these affiliated entities will be required to disclose the amount of back-end compensation received on the loans.

Currently, as lenders, these affiliated companies are not required to disclose any back-end compensation received from servicing-released premiums. This change could shift the companies’ profits and result in lower income streams.

Ultimately, as HUD’s new regulations affect every FHA-approved lender, real estate brokers that own an interest in these companies should pay close attention to the effects these regulations will have on their businesses.

The NATIONAL ASSOCIATION OF REALTORS® acknowledges the contribution made to this article by Phillip L. Schulman, Esq.