The New Housing Crisis - FHA
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| Sun, 03-08-2009 - 12:56am |
The taxpayers will be picking up the tab on the bad FHA insured loans made where the borrower doesn't even have the financial wherewithall to make more than one loan payment.
http://www.washingtonpost.com/wp-dyn/content/article/2009/03/07/AR2009030702257_pf.html
The Next Hit: Quick Defaults
More FHA-Backed Mortgages Go Bad Without a Single Payment
By Dina ElBoghdady and Dan Keating
Washington Post Staff Writers
Sunday, March 8, 2009; A01
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.
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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.
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.
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.
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.
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.
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. >>>full article at the link above

Opal

I posted this article before...
http://messageboards.ivillage.com/iv-elinthenews/?msg=14066.1
>"In 2006, Jackson proposed plans to modernize the FHA lending process. Backed by the White House, his proposal would allow FHA lenders to offer loans with no down payment, eliminating the long-standing 3 percent minimum. Lenders also could increase the size of the loan to cover the median home price in high-cost areas. High-risk borrowers could qualify by agreeing to pay higher premiums.
Jackson said the goals were to encourage first-time home buyers and to help the FHA compete with the booming subprime market. In an online White House forum in 2007, he said the FHA "is undergoing a historic transformation to give homebuyers who do not qualify for prime financing a better alternative to high-cost, high-risk loan products."
But Inspector General Kenneth Donohue chided Jackson and FHA Commissioner Brian Montgomery, a former White House political aide with no previous housing experience. Testifying on Capitol Hill in March 2007, Donohue agreed that the FHA needed changes to help working families, but not to mimic subprime lenders. He said some of the changes could distract the FHA from its affordable-housing mission while helping government-backed lenders reach high-end buyers."<
>""Homeownership appears to be a bigger priority in the administration than affordability and foreclosure," Sen. Christopher S. Bond (R-Mo.) told Jackson at a recent hearing. He added: "I'll tell you quite frankly, I think the emphasis on homeownership helped to drive the foreclosure crisis we're now in. . . . All these wonderful ideas . . . didn't do them any good when we put them in housing they couldn't afford."
Jackson also issued a rule allowing FHA lenders more self-policing. Under the lender insurance rule that HUD implemented in 2006, lenders could endorse FHA loans without prior review and no longer had to submit loan paperwork to HUD. The agency's inspector general and the FBI objected, and HUD's office of general counsel registered concern because detecting fraud would be more difficult without lenders' paperwork."<
Segments from........
HUD Chief Inattentive To Crisis, Critics Say
Jackson's Tenure Ending
http://www.washingtonpost.com/wp-dyn/content/story/2008/04/12/ST2008041202580.html?hpid=topnews