This is a little gem from the Washington Post, going into how horribly broken the FHA is.
The Obama Economic Plan - Taxes for All
A a side note, the comic isn’t related to the article, it just made me laugh.
The last time the housing market was this bad, Congress set up the Federal Housing Administration to insure Depression-era mortgages that lenders wouldn’t otherwise make.
This decade’s housing boom rendered the agency irrelevant. Americans raced to aggressive lenders, seduced by easy credit and loans with no upfront costs. But the subprime mortgage market has crashed and borrowers are flocking back to the FHA, which has become the only option for those who lack hefty down payments or stellar credit. The agency’s historic role in backing mortgages is more crucial now than at any time since its founding.
With the surge in new loans, however, comes a new threat. Many borrowers are defaulting as quickly as they take out the loans. In the past year alone, the number of borrowers who failed to make more than a single payment before defaulting on FHA-backed mortgages has nearly tripled, far outpacing the agency’s overall growth in new loans, according to a Washington Post analysis of federal data.
Did I just read that correctly? Let’s try this one more time….
Many borrowers are defaulting as quickly as they take out the loans. In the past year alone, the number of borrowers who failed to make more than a single payment before defaulting on FHA-backed mortgages has nearly tripled, far outpacing the agency’s overall growth in new loans, according to a Washington Post analysis of federal data.
You’ve got to be kidding me right?
Many industry experts attribute the jump in these instant defaults to factors that include the weak economy, lax scrutiny of prospective borrowers and most notably, foul play among unscrupulous lenders looking to make a quick buck.
If a loan “is going into default immediately, it clearly suggests impropriety and fraudulent activity,” said Kenneth Donohue, the inspector general of the Department of Housing and Urban Development, which includes the FHA.
Really? Mr. Donohue is a genius with a clear talent for pointing out the obvious. If a loan goes into default immediately it is because somebody really, really screwed up. Not one single payment? That has to be as close to fraud as it gets. Yes, I realize that some of these are legit, keep reading, the size and scope of this is insane.
The spike in quick defaults follows the pattern that preceded the collapse of the subprime market as some of the same flawed lending practices that contributed to the mortgage crisis are now eroding one of the main federal agencies charged with addressing it. During the subprime lending boom, many mortgage brokers and small lenders milked the market for commissions and fees by making as many loans as possible with little regard for whether they could be repaid.
Once again, thousands of borrowers are getting loans they do not stand a chance of repaying. Only now, unlike in the subprime meltdown, Congress would have to bail out the lenders if the FHA cannot make good on guarantees from its existing reserves. And those once-robust reserves are showing signs of stress, raising the possibility that taxpayers may have to pick up the tab for the first time since the agency was established in 1934.
Oh now this… This is precious. I seem to remember a few folks on Capitol Hill and a gentleman in a big White House very recently talking about how it is important for only the responsible borrowers to be bailed out. And look at this, another government backed agency getting swamped with a bunch of garbage.
Lets keep reading, shall we? This is getting interesting.
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, according to the Post analysis. The pace of these instant defaults has tripled in one year. By last fall, more than two dozen FHA home loans on average were defaulting this way every day, seven days a week.
Two dozen loans, every day, seven days a week – stunning.
The overall default rate on FHA loans is accelerating rapidly as well but not as dramatically as that of instant defaults.
The agency’s share of the mortgage market is up from 2 percent three years ago to nearly a third of the mortgages now made, its highest level in at least two decades, according to Inside Mortgage Finance, an industry trade publication. The FHA does not lend money directly. It provides mortgage insurance for borrowers working with FHA-approved lenders and uses the premiums to cover its losses. If the premiums are not enough, taxpayers could be on the hook.
Hmm… I believe it was Barney Frank who said, “Nobody should be taking more risk than he or she can afford to pay off.” Funny how the cheerleader for the FHA has such double standards. If you are an underprivileged individual, Frank and the FHA will encourage you to borrow more than you can afford. However, if you make a reasonable amount of money, or worse yet, you are a company, you should not take more risk than you can afford to pay off. Call me crazy, but not being able to make a single payment on a loan seems like it might just be a little more than you can pay off. Back to the article…
At the same time, Congress has substantially increased the amount a homeowner can borrow on an FHA loan in pricey areas, thrusting the agency into markets it was previously shut out of, such as California, where plunging home prices have made people more vulnerable to foreclosure. Moreover, lawmakers last year put the FHA in charge of a program created to address the roots of the financial crisis by helping delinquent borrowers refinance into new mortgages.
On top of all these strains, the agency now faces this swell of loans that default almost immediately.
That’s the ticket! Let’s push loans in overpriced markets, and re-write failing mortgages so that they can fail slower. That way we have give free housing to people, and bleed the rest of the citizens for the losses. Sounds like a great plan. Sign me up!
Under the FHA’s own rules, there’s a presumption of fraud or material misrepresentation if loans default after borrowers make no more than one payment. In those cases, the lenders are required by the FHA to investigate what went awry and notify the agency of any suspected fraud. But the agency’s efforts at pursuing abusive lenders have been hamstrung. Once, about 130 HUD investigators teamed with FBI agents in an FHA fraud unit, but this office was dismantled in 2003 after the FHA’s business dwindled in the housing boom.
Just like the rest of the federal government. We don’t bother to prosecute or investigate fraud. We perpetuate it and then hope no one notices! It really shouldn’t be a problem, I mean according to truthdig.com, “nearly a third of the nation’s population is illiterate or barely literate” – if they can’t read or understand this stuff then I’m sure we can brush it under the rug!
At the same time, the FHA office responsible for approving and policing new lenders has not expanded even as the number of active lenders doing business with the FHA more than doubled to 2,300 in the past two years.
Although the FHA insures mortgages issued by lenders, it leaves these companies to conduct their own business. If a lender writes a lot of bad loans, that’s when the agency can eject it from the program. Experts in housing finance warn, however, that the FHA has inadequate staffing and technology to keep up.
William Apgar, senior adviser to new HUD Secretary Shaun Donovan, agreed that early defaults are a worrisome sign that a lender is abusing FHA-backed loans.
Really? When you write a bunch of loans that don’t get paid you might be abusing your government backed get out of jail free card? More talent for pointing out the obvious in our leadership. These folks are wicked smart…
Malfeasance is of such concern to the Obama administration, he said, that Donovan’s first meetings at HUD were about ramping up measures to combat fraud.
“We have to make sure people don’t scam the system and when they do, they are held accountable,” Apgar said.
Pressure to ‘Get These Loans Done’
For those still looking to write loans in volume, the only game in town is government-backed mortgages, mostly those guaranteed by the FHA. But unlike with subprime business, lenders in the FHA program are asked to follow agency rules requiring borrowers to document their income, put up a modest down payment and commit to live in the homes.
“With the onslaught of FHA lending that’s going on right now, they’re bringing in lenders who are not familiar with FHA guidelines,” said David Hail, a vice president of Allied Home Mortgage of Houston, one of the nation’s largest FHA partners. He said the lenders are “under pressure from their builders or buyers to get these loans done. They’re approving loans that they should not be.”
Okay… I’m getting tired of this. The rest of the article continues to explain how woefully broken the FHA is.
Now what I really want to know is this. If the FHA is this horribly broken, why on earth do we continue to purport them as the solution to this housing problem? If Barney Frank says that lenders must have skin in the game, why is he pushing an agenda that allows lenders to pawn loans off on the tax payers, and give tax payers the ability to have no skin in the game? In fact, Mr. Frank is the champion for HR 600, a little piece of legislation that supports zero down payments with FHA funding.
When on earth is our government going to own up to the fact that Fanny Mae, Freddie Mac and the FHA are horribly broken entities. They are the grease in the wheel for our housing crisis and cannot be a part of a real solution. When the risk of default is taken off of the lender, they are being compensated to write bad loans. People do what they are paid to do, it is a very basic concept in social-psychology. I’m sure the smart folks in Washington understand this… Well of course they do, they do what the lobbyists pay them to do, they have first hand knowledge of the whole process!
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