FHA Shifting

The Federal Housing Authority (FHA) announced that it has served subpoenas on 15 mortgage companies with suspiciously high default rates and foreclosures for loans backed by the FHA.

On Tuesday, Department of Housing and Urban Development’s inspector general, Kenneth Donohue, said he wanted to determine why defaults are so elevated among the 15 companies being probed and whether any have committed fraud.

“Many of these target loans didn’t last but a short time before defaulting,” Donohue said. “We will conduct an investigation, if appropriate, to determine who is responsible and will recommend that appropriate action be taken against individuals and corporations.”

The FHA does not make loans, but rather offers insurance against default. Borrowers are willing to pay for the insurance because FHA loans only require down payments of 3.5 percent of the purchase price.

The lenders targeted by FHA officials include some of its worst-performing active lenders. For example, almost one in five loans made by Alethes LLC of Lakeway, Texas, over the past two years went into default, compared with a national average of about 5 percent.

The FHA has already kicked several lenders out of the program. Taylor, Bean & Witaker and Lend America were both kicked out of the FHA which insures loans against default/foreclosure.  Is it possible that lenders who were previously in the subprime lending industry and responsible for much of the foreclosure crisis have now targeted the FHA program with the intent of reaping the benefits of a quick default and foreclosure by ill-prepared borrowers?  I wouldn’t put it past them. We just need to look at the current foreclosure crisis to understand that this is a possibility.   And the FHA which now backs 30 percent of all the mortgage loans made in America is suffering.  The FHA has experienced so many losses that its reserves have sunk below the minimum level required by Congress. Could we see another bail out or another wave of foreclosures, this time coming from the FHA program?

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