Lenders Beef Up FHA Underwriting.(Federal Housing Administration)

Washington -- The penalties for getting caught under the Credit Watch program are not all that painful sometimes, but they are forcing Federal Housing Administration lenders to tighten their underwriting standards.

Last September, the Department of Housing and Urban Development placed the San Antonio branch office of Fieldstone Mortgage Co. on its Credit Watch list for having a default and claim rate that was twice the average of other FHA lenders in the same Texas market.

FMC, based in Columbia, Md., closed the branch and terminated the employees after conducting an investigation. However, Fieldstone has another FHA-approved branch in San Antonio, so it can still serve the San Antonio market.

In its investigation, Fieldstone found that the branch did a lot of business with homebuilders and a lot of the borrowers were minority, first-time homebuyers who received downpayment assistance, according to FMC general counsel Cynthia Harkness.

In addition, the branch originated a lot of the mortgages with 20-year maturities. "We found there is a glitch in the AU systems that assign an overly high credit rating on 20-year loans," she said. "We have completely ceased that practice."

(Fieldstone ran the FHA loans through the automated underwriting systems offered by Fannie Mae and Freddie Mac at the time.)

FMC's parent, Fieldstone Investment Corp., is currently in ...