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Pitfalls of FHA Lending


With subprime practically gone and lending down across the board, lenders are jumping on the Federal Housing Administration (FHA) bandwagon as an alternative. Many think FHA lending is just conventional lending with government paperwork. They are seriously mistaken. FHA's underwriting, loan processing, secondary marketing and loss-mitigation requirements are unlike anything in the private conduit world. One of the most critical operational requirements for FHA lending today is having the ability to provide Direct Endorsement approvals. This generally means hiring underwriters with this authority. Companies specializing in pooling and securitizing FHA loans must be approved as Ginnie Mae issuers, and lenders must meet documentation deadlines, referred to as the "initial certification" and "final certification." FHA also expects and values pre-funding reviews, even though they are not officially required, to show that lenders are not susceptible to fraud or other types of operational problems that will increase the likelihood of default.

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