FHA Neighborhood Watch
Many lenders who are jumping into FHA do not understand the implications of FHA neighborhood watch. Neighborhood watch is FHA’s way of monitoring lenders by comparing them to all other FHA Lenders. Many confuse Neighborhood watch with Credit Watch. Neighborhood watch is a system to track lender performance, Credit Watch is the rules and policy that leads to a lender being put on restrictions based on that data.
First you have to understand what FHA considers a default. For the purposes of neighborhood watch a loan is in default when a payment is 90 days late. There is a common misconception that only loans in foreclosure count for neighborhood watch, this is incorrect.
Statistically, no loan can default in the first 3 months after it closes. This means that all originations are “free” for the first 3 months. The longer a loan has been closed the higher chance and greater opportunity there is for default. This means that new loans are more beneficial than older loans. In circumstances of declining production neighborhood watch issues can arise. If your production drops in a particular branch there are not enough “young loans” to offset the “old loans”. If a branch has an increasing default rate it is important to consider the production trend.
Credit watch is based at the branch level. Each branch is reviewed individually and compared to the areas where it originates loans. When checking your standing for credit watch using the neighborhood watch system you should use the following settings: institution by branch and compare to local HUD offices. This is the system HUD uses for Credit Watch.
Neighborhood watch is also used to determine a lenders ability to participate in the Lender Insuring program. This is based on the institution level not the branch level.