WASHINGTON – June 19, 2015 – A revised defect classification system is expected to help Federal Housing Administration (FHA) mortgagees be more confident about making government-insured loans.

A notice Thursday from the Department of Housing and Urban Development (HUD) said FHA’s Single Family Loan Quality Assessment Methodology has been posted. Dubbed “Defect Taxonomy,” the framework is part of HUD’s “Blueprint for Access” and intended to encourage FHA lending to qualified borrowers across the credit spectrum.

According to HUD Release No. 15-078, the methodology explains how FHA intends to categorize loan defects found in single-family loans insured by the agency.

The framework focuses on three core concepts including identifying defects, capturing the sources and causes of defects, and assessing defect severity.

The number of FHA single-family loan defect codes is being slashed to nine from 99, according to HUD.

The nine defect categories are income, credit, loan-to-value ratio and maximum loan amount, assets, property eligibility, appraisal, borrower eligibility and qualification, mortgage eligibility, and lender operations.

FHA’s approach is intended to evolve from an opaque to a transparent system that provides more details about the sources and causes of a defect.

“This new guidance gives lenders greater insight into how FHA will capture defects and their relative severities,” HUD Principal Deputy Assistant Secretary for Housing Edward Golding stated in the notice. “By enhancing our approach, lenders will have more confidence in how they interact with FHA, and we anticipate will be more willing to lend to future homeowners who are ready to own.”

No date has been set for the implementation of the defect taxonomy.

Mortgage Bankers Association President and Chief Executive Officer David Stevens issued a statement calling the move “a step in the right direction” for helping HUD tackle the most egregious portfolio risk.

“There is more work that surely needs to be done, and MBA believes that the industry’s input on issues such as this must be an important part of the decision making process to expand homeownership opportunity,” Stevens said.

Source: Mortgage Daily. Distributed by Tribune Content Agency, LLC.