FHA-Backed Lenders: Terrible Underwriters

Remember when the FHA was supposed to solve the "credit crunch" by providing much-needed liquidity to borrowers who could no longer get mortgages?  It turns out that FHA-backed lenders are just as bad at mortgage underwriting as the worst of the subprime lenders.  The Washington Post reports that the number of borrowers who failed to make more than a single payment before defaulting on an FHA-backed mortgage nearly tripled, far outpacing the agency's overall growth in new loans.  Industry experts attribute the jump to the weak economy, lax scrutiny of prospective borrowers and most notably, foul play among unscrupulous lenders.  More than 9,200 of the loans insured by the FHA in the past two years have gone into default after no or only one payment.  Of course, the overall default rate on FHA loans is accelerating rapidly too, but not as dramatically as the rate of instant defaults.

But wait, the story only gets better!  The agency's share of the mortgage market is up from 2% three years ago to nearly a third of the mortgages now made.  Under the FHA's rules, if the borrower makes no more than one payment before defaulting there's a presumption of fraud that must be investigated by the lender.  However, the FHA's fraud unit which used to investigate abusive lending practices was dismantled in 2003 as the FHA's business dwindled (presumably it lost business to all of the now-defunct subprime lenders.)  Furthermore, the FHA office responsible for approving new lenders has not expanded despite the fact that the number of active lenders has doubled to 2,300 in the past two years.  Although lenders that are deemed abusive can be kicked out of the program, the FHA does not appear to be adequately staffed to police all of its lenders.  

The article gives a depressing example of a condo project in West Palm Beach, Florida where a 28 unit apartment building was converted to condos three years ago.  The complex had the same owner as an FHA-approved mortgage company that pushed no-money-down, no-closing-cost loans to prospective buyers.  Now, 80% of the loans on the project have defaulted, a dozen after no payment or one.  This particular lender, called Great Country, has the highest default rate of any FHA lender, brace yourself - a default rate of 64%.  Seriously, click on the link if you think that was a typo.  64% of all loans have gone bad!  The article did not mention that Great Country has been kicked out of the FHA program so I'm assuming it is still a lender!  With the FHA taking all of the risk of the mortgage defaults, it's possible to stay in business with that kind of track record.  I, for one, am hoping that Barney Frank reads this article and decides to beef up fraud investigations at the FHA or "Hope For Homeowners" will turn into "Weep the Taxpayers."