www.hudclips.org 


U. S. Department of Housing and Urban Development
Washington, D.C. 20410-8000

August 9, 1995
 
Mortgagee Letter 95-37
 
TO:  ALL APPROVED MORTGAGEES
 
SUBJECT:  Mortgagee Approval -- Implementation of Origination
          Approval Agreement and Credit Watch Status Procedures
 
Overview
 
     This Mortgagee Letter is to advise you that the Department
will soon implement the Origination Approval Agreement and Credit
Watch Status procedures required by its mortgagee approval
regulations at 24 CFR Part 202, which became effective on January
8, l993.  The requirements of this Mortgagee Letter are not new.
They explain the procedures for implementing the regulatory
changes.
 
Origination Approval Agreement
 
     Approval of a mortgagee by the Department constitutes an
Origination Approval Agreement between HUD and the mortgagee
under which a mortgagee's approval to originate insured mortgages
may be terminated.  The termination of a mortgagee's approval
under this Agreement is separate and apart from any action taken
by HUD's Mortgagee Review Board as provided under the
Department's regulations at 24 CFR Part 25.
 
     o    Every three months, the Department will
          review the number of defaults and claims for
          mortgages originated by mortgagees in the
          geographic area served by a HUD Field Office.
          At least l2 months of a mortgagee's
          production will be monitored under this
          provision before any action will be taken by
          the Department.
 
     o    A mortgagee that has a percentage rate of
          claims and defaults for insured mortgages
          originated in a HUD Field Office jurisdiction
          during the federal fiscal year that was in
          excess of 200 percent of the normal rate
          (field office's average), and the national
          rate for insured mortgages, will be notified
          that its Agreement will be terminated in 60
          days.
 
                               -2-
 
     o    Prior to sending a termination notice, the
          Department will also review zip code and, if
          appropriate, census tract concentrations of
          the defaults and claims.  If it is determined
          that the mortgagee's rate of claims and
          defaults is not excessive due to the lack of
          mortgage lending in an underserved area, the
          Department may determine not to send a
          termination notice.
 
     o    Prior to any termination of the Agreement, a
          mortgagee may request an informal conference
          with the Deputy Assistant Secretary for
          Single Family Housing, or his or her
          designee, to discuss the reasons for the
          excessive defaults and claims.  Excessive
          claims and defaults caused by factors beyond
          the mortgagee's control may result in placing
          a mortgagee on credit watch status rather
          than termination of the Agreement.
 
     o    Termination of the Agreement precludes a
          mortgagee from originating HUD-FHA insured
          mortgages.  It does not preclude a mortgagee
          from purchasing or servicing insured
          mortgages.
 
     o    Where a mortgagee's branch office exceeds the
          claim and default threshold, the branch
          approval alone may be terminated.
 
Credit Watch Status
 
     A mortgagee that has a rate of defaults and claims for
insured mortgages originated in a HUD Field Office jurisdiction
during a federal fiscal year that is greater than l50 percent but
equal to or less than 200 percent of the field office's average,
will be notified that it is being placed on credit watch status.
Before the credit watch notice is sent, the Department will
review the census tract and zip code concentrations of defaults
and claims.  If it is determined that the excessive rate is the
result of mortgage lending in underserved areas, the Department
may determine not to place the mortgagee on credit watch.
 
     o    After notification to the mortgagee of its
          credit watch status, the Department will
          track insured mortgages originated by the
          mortgagee during a six-month period from the
          date of the credit watch notice for excessive
          claim and default rates.
 
                               -3-
 
     o    A mortgagee will be removed from credit watch
          status if its claim and default rate
          decreases to l50 percent or less within one
          year following the tracking period.  The
          Origination Approval Agreement of a mortgagee
          may be terminated if its claim and default
          rate during the tracking period remains above
          l50 percent of the field office's average
          rate one year after the tracking period.
 
Monitoring Claims and Defaults
 
     The Department will monitor a mortgagee's claim and default
rates through a newly developed Mortgage Portfolio Analysis
System (MPAS).  This automated system measures the performance of
FHA insured single family portfolios by originating mortgagees.
The system analyzes a mortgagee's claim and default rates within
the jurisdiction of a HUD Field Office, nationwide, by branch
office(s), and by a five-digit zip code.
 
     The procedures outlined in this Mortgagee Letter should have
minimal impact for mortgagees that have in place an adequate
quality control system for loan origination.  These procedures
are loss mitigation and quality assurance tools for the
Department in carrying out its risk management responsibilities.
 
     If you have any questions about these procedures, please
contact the Lender Approval and Recertification Division at 202-
708-3976.
 
Sincerely yours,
 

Nicolas P. Retsinas
Assistant Secretary for Housing-
Federal Housing Commissioner