Lenders can expect to see some changes and clarification with how the Federal Housing Administration (FHA) will handle defect taxonomy and their guidelines. Today, the FHA posted its Single Family Loan Quality Assessment Methodology or “Defect Taxonomy”, which explains how FHA intends to categorize loan defects found in Single Family FHA endorsed loans today.
“The framework, part of the “Blueprint for Access,” centers on three core concepts: identifying a defect, capturing the sources and causes of a defect, and assessing the severity of a defect,” the FHA said. “The taxonomy is part of FHA’s effort to provide greater clarity and transparency to Single Family FHA approved lenders to encourage lending to qualified borrowers across the credit spectrum.”
FHA has been working on these defect changes over the past year in order to enhance its quality assurance process. The new taxonomy will complement the updated certification language FHA has released and FHA’s new handbook, the first section of which becomes effective in September.
Lenders will be able to provide borrowers with increased clarity with respect to quality assurance measures and will also be able to originate loans confidently in knowing that their mortgages meet FHA standards, the FHA said. The FHA insurance fund, borrowers, lenders, and taxpayers will all be more protected with the new enhancements in the way the FHA provides policy direction and monitors lender compliance and performance.
“This new guidance gives lenders greater insight into how FHA will capture defects and their relative severities,” said Edward Golding, Principal Deputy Assistant Secretary for Housing. “By enhancing our approach, lenders will have more confidence in how they interact with FHA, and we anticipate will be more willing to lend to future homeowners who are ready to own.”
According to the FHA, single family currently uses 99 different codes to label defected loans. Once the taxonomy is in place, it will only be nine options to choose from. These codes will identify the source and cause of the defect and offer some additional information concerning the significance of a given deficiency within each category. This will provide lenders with the information they need to originate loans efficiently and reduce errors that could lead to enforcement actions. Additionally, the taxonomy will allow the FHA to monitor trends in deficiencies and decide whether or not policies need to be revised.
No effective date has been determined for the Defect Taxonomy at this time, the FHA said. The administration is just offering a forewarning to lenders concerning new single family FHA taxonomy policy changes.
The nine defect categories under the new taxonomy are:
- Borrower Income (BI)
- Borrower credit / liabilities (BC)
- Loan to value and max mortgage amount (LM)
- Borrower Assets (BA)
- Property eligibility (PE)
- Property appraisal (PA)
- Borrower eligibility and qualification (BE)
- Mortgage eligibility (ME)
- Lender operations (LO)
Click here to view FHA’s Single Family Housing Loan Quality Assessment Methodology.
Click here to view the FHA's "Blueprint for Access."