Lender Challenges HUD Default Rule

BROOKLYN (CN) - Ideal Mortgage Bankers claims the Department of Housing and Urban Development exceeded it authority by adopting a regulation that allows it to bar lenders from originating loans insured by the Federal Housing Administration. Ideal claims the HUD regulation on mortgage defaults "is biased against lenders such as Ideal Mortgage that have been originating FHA loans for two or more years."

The complaint states: "On Dec. 9, 1992, HUD enacted a final rule providing for the termination of mortgagees whose combined default and claim rate 'exceed(s) 200 percent of the normal rate and exceed(s) the national default and claim rate for insured mortgages.'" Under the regulation, a loan is in default "if the loan is in default 90 or more days within 24 months of then the loan is insured. 24 CFR § 202.2."

Ideal claims this discriminates against established lenders and in favor of lenders just entering the market "because the mortgagees being compared under the termination regulation are not similarly situated."

Ideal says it has been able to originate FHA-insured mortgages since 1988. HUD informed it in January that it would terminate Ideal's New York branch ability to issue FHA-insured mortgages unless Ideal could give it a good reason why not.

In a claim that seems counterintuitive in light of the national home and lending crisis, Ideal says, "the combine default and claim ratio relied upon by HUD is unfairly skewed in favor of mortgage lenders who have only recently started originating FHA insured loans. Correspondingly, the ratio is skewed against Ideal Mortgage, which has been historically committed to making FHA insured loans to people in underserved areas, even during the late 1990s and early 2000 years when many lenders abandoned FHA insured lending in favor of subprime lending. More specifically, underwriting standards for FHA insured loans have increased over the last year. This means that more recently originated FHA insured loans are of comparatively higher credit quality than those originated more than a year ago. As a result, mortgagees with a longer history of FHA mortgage loan originations will have higher default and claim ratio than mortgagees who have only originated FHA insured loans for less than a year."

Ideal wants HUD's termination action against the New York branch set aside and 24 CFR § 202.2(c) declared invalid. It is represented by Daniel Markham with Coughlin Duffy.

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