Draft defect taxonomy could have “chilling effect” on FHA market

Envisioned to provide rules of the road for mortgage servicers, industry groups and housing advocates say the Federal Housing Administration‘s draft defect taxonomy would instead keep lenders away.

The document spells out what remedies the agency may seek if it finds loan-level defects pertaining to servicing. Remedies — punishment for mistakes, in other words — could be as mild as producing additional documentation or as severe as life-of-loan indemnification. Other forms of financial remediation could include borrower refunds, principal reduction, account adjustment or remittances paid to FHA.

Industry and housing advocates say the document is unclear, and will not spur the return of depositories that in recent years have abandoned the FHA market. Industry groups have asked FHA for more time to provide feedback.

Meg Burns, executive vice president of the Housing Policy Council, who was previously director of the Department of Housing and Urban Development’s office of single family program development, said the document did not rise above a “list of sections of the single-family handbook without any specific requirements.”

“I think [HUD] would like for this to be the kind of document that would serve as a compliance roadmap that would indicate what is important,” said Burns. “Unfortunately, it lacks the detail necessary to serve that purpose.”

A HUD spokesperson said the agency expects and encourages industry feedback on the draft defect taxonomy, and it will take that feedback into consideration before moving forward.

“It is important to note that the draft Servicing Defect Taxonomy that FHA posted on its Drafting Table on October 28 is exactly that – a draft,” said a HUD spokesperson. “We do believe that the additional clarity that will be provided through a final servicing defect taxonomy will be beneficial to those doing business with FHA.”