One of the most quoted lines in moviedom is Arnold Schwarzenegger’s “I’ll be back” from the Terminator movies.  The Department of Housing and Urban Development, on August 22, 2023, published a notice that it had terminated certain Direct Endorsement approval of a HUD-approved mortgagee.  The Credit Watch Terminator is back. 

DE approval generally authorizes a mortgagee to underwrite single-family mortgage loans for Federal Housing Administration insurance endorsement under HUD’s popular 203(b) loan program.  See 24 C.F.R. Part 203; 12 U.S.C. § 1709.  HUD can terminate DE approval if the mortgagee has a rate of defaults and claims on insured mortgages originated in an area that exceeds 200 percent of the normal rate, and exceeds the national default and claim rate for insured mortgages.  Termination prohibits the mortgagee from underwriting FHA-insured mortgages within specified jurisdictions, and the mortgagee must cease making FHA-insured loans or find a workaround (e.g., third-party relationships).  If the DE approval is terminated, the mortgagee must wait at least six months to seek reinstatement and must meet a variety of other specific requirements.  Companies can, and should, fight termination due to possible far-reaching consequences that can last for the remainder of the companies’ existence.

During the pandemic, HUD showed significant self-restraint in the DE termination area, presumably because of the likelihood that widespread shutdowns, forbearance initiatives, and other pandemic aberrations distorted HUD’s Neighborhood Watch data.  These still could be good defenses to termination in appropriate cases. 

The termination in the recent case suggests that HUD is ramping back up to a more normal level of termination activity.  Mortgagees should be watching their Neighborhood Watch numbers closely. 

Companies should not wait to deal with Credit Watch termination issues until after their claim and default numbers already put their businesses in jeopardy.  Companies that have received termination letters should also consider how to mitigate the damage caused by termination.  But to avoid issues before they arise, companies should proactively monitor their numbers, and take action before receiving a Credit Watch termination letter.  In addition, it is important that companies not forget to update their HUD records timely – itself a common violation – to ensure the company receives critical communications from HUD.  It is essential to act immediately upon receiving a termination letter.

Now that the Credit Watch Terminator is back, how will your team stay on top of this? 

For more information on this matter, contact Troy Garris at troy@garrishorn.com.