In an effort to further reduce risks to its single-family insurance fund which continues to play a critical role in today’s housing market, the Federal Housing Administration (FHA) proposed new regulations on Monday in order to boost lender oversight, tighten controls, and streamline lender approval.

In its proposal, FHA suggested increasing the net worth requirements of FHA-approved lenders, strengthening lender approval criteria, and making lenders liable for the practices of their correspondent mortgage brokers. Through this proposed rule, FHA will be able to more effectively focus its resources on lenders who pose the greatest potential threat to its insurance funds and ensure that lenders possess the appropriate resources for financial services they deliver.

Comments regarding this proposal are being solicited by the FHA for 30 days, and those received will be considered in the development of a final rule. “With FHA’s crucial role in today’s housing market, it is critically important that we are able to manage risk and to ensure that our reserves are adequate to cover future losses,” David Stevens, FHA commissioner, said. “We are taking a number of aggressive steps to ensure that we are able to continue to support the housing market in the short-term and provide access to home ownership to the underserved in the long term, while minimizing the risk to the American taxpayer.”

Stevens announced a set of credit policy changes aimed at enhancing FHA’s risk management function, during September of this year. He also revealed his intent to propose new regulations to further strengthen FHA’s risk management, which would be possible through the proposed rule released Monday.

Through this proposal, lender approval will be both strengthened and streamlined. Lenders seeking approval to originate, underwrite, or service an FHA loan must meet the eligibility criteria for a supervised or non-supervised mortgage. Loan correspondents will continue to be able to originate FHA-insured loans through their relationships with approved mortgages, but they will not be able to receive independent approval for origination eligibility. Instead, FHA-approved mortgages will be required to assume responsibility and liability for the FHA-insured loan underwritten and closed by the approved mortgagee. Through these changes, which align with Fannie Mae and Freddie Mac, there may be an increase in the number of loan Correspondents eligible to participate in the origination of FHA-insured loans while providing for more effective oversight of loan correspondents through FHA-approved mortgagees.

Strengthening the capacity of FHA-approved mortgagees is also hoped for through this new proposal. In order to strengthen the financial capacity of FHA counterparties to ensure they can meet their obligations, the proposed rule would require mortgagees maintain a minimum of $1 million in net worth during the first year and at least $2.5 million of net worth within three years of the effective date of the rule. This is a drastic increase from the $250,000 of net worth required for approved mortgages by the FHA since 1993. The FHA said these changes are consistent with industry standards and will ensure that FHA lenders are sufficiently capitalized to meet potential needs. This will then permit the FHA to mitigate losses and decrease risks to its insurance fund.