Will FHA Leave Lenders and Loan Purchasers Holding the Bag for Defaulted Insured Refinancings Under the HOPE Program?
Among the many reasons that FHA lost market share over the last several years was a perception that FHA looked for ways to reallocate the risk of loss to lenders on insured loans in default. Loan servicers and subsequent holders, however, did not have to worry because the “incontestability” clause contained in the National Housing Act requires FHA to honor its mortgage insurance policy in the hands of the loan holder that did not itself engage in fraud or misrepresentation. This means that FHA may assert indemnification claims against the originating lender for violations of the FHA insurance program but FHA still has to pay the insurance benefits to any innocent subsequent holder. The Act creates several issues that increase the risk to originating lenders and subsequent holders that FHA will renege on the mortgage insurance on loans refinanced under the HOPE Program. From a lender’s perspective, the fact that a borrower in default can qualify for a new insured refinancing loan raises
