Written By: Bonnie Wilt-Hild, Op-Ed Writer
Very recently I have been made aware of what is being termed as indemnity flags appearing on FHA case number assignments and decided now was a really great time to discuss the implications of what these actually mean particularly where the FHA streamline refinance program is concerned.
First I would like to explain what an indemnity flag is. It appears that as of now, when a case number assignment order is placed, the FHA case number assignment, if the case number is assigned, will return with an indemnity flag if the loan being refinanced was a FHA loan and the case required indemnification by the lender that underwrote and closed the case being refinanced. FHA requires indemnification on any case that has been determined unacceptable from an underwriting standpoint due to material deficiencies, deviation from standard guideline criteria and so on. This is basically the last step before NOR and FHA’s refusal to insure the case.
As we are aware, FHA completes a post endorsement technical review on approximately 10% of all cases funded by a particular lender within a given calendar year. If these cases are determined unacceptable the underwriter will receive an unacceptable rating for the case and if the errors noted during the review indicate that the likelihood of default is now far greater as a result of poor underwriting than FHA may require that a lender indemnify HUD against future losses where the case is concerned and this usually means that the lender must provided financial restitution to offset future losses.
As stated above FHA has now started to inform new lenders where refinance transactions are concerned that the case being refinanced required indemnification. This is really helpful, particularly in the case of streamline refinances where it is a normal course of business to rely heavily on the original underwriting of the case. Where streamline transactions are concerned, HUD requires very little documentation to determine loan approval and income and asset information in most cases is not required. This can become quite a liability from an underwriting standpoint if the original case as approved was determined to be unacceptable and required indemnification by the original lender.
With that said it appears that the trend in the secondary market is to require that any case number assignment that has been issued with an indemnity flag where a particular streamline refinance transaction is concerned will be required to meet full credit qualifying underwriting criteria. This means paystubs, W-2 wage statements, calculating DTI, running the case through Total Score and so on.
This actually makes perfect sense when you consider that underwriting integrity on the original case was considered to be less than sufficient. Underwriters need to be aware of this flag now and if discovered in a case that you are underwriting, it may be possible that you will need to do a full underwrite on the case to determine acceptability of the overall case file for HUD and investor purposes. Be sure to check your investor guidelines regarding this flag, like I said some of them have all ready gone to full credit qualifying requirements under these circumstances and you want to make sure you have a salable loan. As always, happy underwriting.
About The Author
Bonnie Wilt-Hild - As an op-ed writer, Bonnie has held many mortgage underwriting positions, including Senior FHA DE Underwriter for a major lending institution. With over 25+ years of senior-level FHA/VA Government underwriting experience, Bonnie is considered the "Queen of FHA Loans".