The Federal Housing Administration insures or guarantees the repayment of some loans secured by certain classes of mortgages. When the mortgage is not being paid, the loan is "nonperforming". The lender forecloses because the loan is nonperforming and then the lender makes a claim on the FHA guarantee.
However, there are certain exclusions in the FHA guarantee just as there are exclusions in most other insurance. The FHA will not pay claims if the lender making the claim violated underwriting or servicing standards or engaged in other specified forms of excluded conduct.
Rather than being adjudicated as violating underwriting and servicing standards in the issuance and servicing of FHA-guaranteed mortgages, it is reported that many lenders are holding off on making any such claims right now.
There appears to be an affirmative benefit from not making the claims, including the good that the lenders derive from avoiding the adjudication that the lenders' claims are excluded from the FHA insurance. Lenders reportedly do not have to post reserves to cover any loans which are "performing" -- and if the lenders have not foreclosed, then the mortgages and the loans they secure must by that fact be "performing" and so the lenders do not have to post reserves on account of them.
Further, the Federal Department of Housing and Urban Development, which oversees the FHA, has responded to some claims by four (4) banks in the past year that in making those claims, the lenders have violated the False Claims Act.
All these and related issues are raised by Floyd Norris, "The Guarantee That Banks May Fear to Invoke" (Economix Blog on New York Times website, posted Tuesday, October 8, 2013); Kate Berry, "Buried in Fine Print: $57B of FHA Loans Big Banks May Have to Eat," American Banker Online, posted Monday, October 7, 2013).
All these issues are interesting, particularly the insurance-related questions. They deserve attention. I wanted to bring them to your attention now. I will address them further in more extensive articles in the future, after I have had the opportunity to research them further.
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