Friday, April 13, 2007

FHA and Subprime: Who Is Taking the Fraud Risk?

by Tanta on 4/13/2007 12:59:00 PM

CR is away from the blog today, so I guess it's all mortgage, all the time, unless I break down and start the Rock Blogging a day early.

But there's plenty of mortgage things to talk about. The Washington Post brings us this delightful one, "Fraud Seen Possible In Bush Loan Plan":

A Bush administration plan to offer low- and middle-income home buyers an alternative to subprime loans may be susceptible to fraud, the inspector general for the Department of Housing and Urban Development said. The proposal, incorporated in legislation introduced last month, would make it easier for borrowers to get mortgage insurance from the Federal Housing Administration but would do little to assure adequate oversight of lenders, appraisers and lawyers, the inspector general, Kenneth Donohue, said in a telephone interview.

"The FHA has to go back and make sure the same thing that has happened with subprime loans doesn't happen with its program," said Donohue, who conducts internal audits and criminal investigations of HUD programs. "The FHA has to
make sure it doesn't get taken by the lenders, and it has to make better reviews of loan portfolios."

Legislators and federal regulators are grappling with how to help subprime mortgage borrowers facing foreclosure. State authorities have opened fraud investigations against brokers and lenders for allegedly misleading some consumers about the terms of their loans.

The FHA reviews only 6 to 7 percent of its loan portfolios a year to ensure that they have been properly administered, Donohue said. The agency needs more resources to review loans and claims, and to try to recover losses, he added. Donohue has been inspector general since 2001. Jerry Brown, a spokesman for FHA Commissioner Brian Montgomery, declined to offer a substantive response to Donohue's warning. "We respect the IG's right to have an opinion," he said. He pointed to recent congressional testimony in which Montgomery pledged to manage any expansion of the FHA's programs in a "financially prudent way."

The FHA, which is part of HUD, is trying to recover market share lost in recent years to subprime loans, which are often offered by mortgage brokers to borrowers with poor or limited credit histories. The popularity of subprime loans has led to a sharp increase in delinquent payments and foreclosures as consumers struggle to pay their mortgages and their homes lose value in the housing downturn.

The FHA's share of all home financing dropped from 14.1 percent to 3.8 percent from 1999 to 2006, according to FHA data.