FHA Loan Expert Blog

WASHINGTON - U.S. Department of Housing and Urban Development (HUD) Inspector General Kenneth M. Donohue and Federal Housing Administration (FHA) Commissioner David H. Stevens announced today an initiative focusing on mortgage companies with significant claim rates against the Federal Housing Administration mortgage insurance program.

HUD Office of Inspector General (OIG) subpoenas were served to the corporate offices of 15 mortgage companies across the country demanding documents and data related to failed loans which resulted in claims paid out by the FHA mortgage insurance fund.

Inspector General Donohue said, “The goal of this initiative is to determine why there is such a high rate of defaults and claims with these companies and whether there is wrongdoing involved. We aren’t making any accusations at this time, we have no evidence of wrongdoing, but we will aggressively pursue indicators of fraud. We are members of the President’s Financial Fraud Enforcement Task Force and today’s activities reflect our commitment to seeking information on red flags that may arise from data analysis.

” This initiative was prompted, in part, by the FHA Commissioner, David Stevens, who was alarmed by the incidence of claims against the FHA insurance fund by a number of poor performing companies and reached out to the HUD OIG for assistance.

FHA Commissioner David Stevens said, “We are taking risk management extremely seriously. In addition to the policy changes we are implementing and additional changes we plan to announce later this month, we need to hold FHA lenders accountable for the high rates of defaults and claims against FHA. The Inspector General’s initiative will help us determine whether there is fraud and better manage risk in the long run.

” The HUD OIG identified these direct endorsement companies from an analysis of loan data focusing on companies with a significant number of claims, a certain loan underwriting volume, a high ratio of defaults and claims compared to the national average, and claims that occurred earlier in the life of the mortgage. These are key indicators of problems at the origination or underwriting stages. The HUD OIG wants to see why these loans failed.

Some actions available to the HUD OIG are audits, investigations, and inspections and evaluations. In addition, we rely on the support of the Department of Justice (DoJ), and of State and local law enforcement. The DoJ is available to pursue both civil and criminal legal actions against wrongdoers. HUD is available to proceed with administrative sanctions such as suspensions, limited denial of participation, debarment, and civil monetary penalties.

The probe will be conducted by the HUD OIG’s Audit and Investigation staff jointly. They will assess why these companies have high default rates, especially at this unprecedented time when the FHA mortgage insurance program represents such a significant percentage of mortgages currently in force in our country.

This probe is a new type of approach in which HUD OIG is focused on corporate offices rather than individual branch offices. This is a starting point for more detailed reviews if abuses are uncovered, and the HUD OIG anticipates that more probes may follow.

“The FHA market share has skyrocketed,” Inspector General Donohue further said. “Our job is oversight. We work for the American taxpayer. Each loan on this list will be thoroughly examined and we will track down the reasons why it failed. Once we determine the causes, we will look to see whether there is a need for further review or remedial action. We want to send a message to the industry that as the mortgage landscape has shifted we are watching very carefully and that we are poised to take action against bad performers.”
The following companies were served OIG subpoenas today:

First Tennessee Bank N.A., Memphis, TN
Alethes LLC, Lakeway, TX
Security Atlantic Mortgage Co., Edison, NJ
Pine State Mortgage Corporation, Atlanta, GA
Birmingham Bancorp Mortgage Corporation, West Bloomfield, MI
Alacrity Financial Services, LLC, Southlake, TX
Assurity Financial Services, LLC, Englewood, CO
D and R Mortgage Corporation, Farmington, MI
Webster Bank, Cheshire, CT
Mac-Clair Mortgage Corporation, Flint, MI
Americare Investment Group, Inc., Arlington, TX
1st Advantage Mortgage, Lombard, IL
American Sterling Bank, Independence, MO
Sterling National Mortgage Company Inc., Great Neck, NY
Dell Franklin Financial LLC, Columbia, MD

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The Department of Housing and Urban Development Office of Inspector General is statutorily authorized to detect and prevent waste, fraud and abuse, and to promote the effectiveness and efficiency of government operations. The Federal Housing Administration provides mortgage insurance on loans by FHA-approved lenders throughout the United States and its territories. The FHA insures mortgages on single family and multifamily homes including manufactured homes and hospitals. It is the largest insurer of mortgages in the world.

U. S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
WASHINGTON, D. C. 20410-8000

OFFICE OF THE ASSISTANT SECRETARY FOR
HOUSING-FEDERAL HOUSING COMMISSIONER
Mortgagee Letter 89-14
TO:  ALL APPROVED MORTGAGEES
ATTENTION:  Servicing Managers (Single Family)
SUBJECT:  Implementation of Deficiency Judgment Activities
 
     The Department of Housing and Urban Development (HUD) published
its Final Rule on deficiency judgments in the Federal Register on
February 16, 1988 (at 53 FR 4384).  The Rule, which appears in the
Code of Federal Regulations at 24 CFR 203.369, went into effect on
March 28, 1988.  It makes it possible for HUD to require that lenders
pursue deficiency judgments, but only in cases where foreclosures
involve mortgages insured pursuant to firm commitments (or direct
endorsement credit worksheets) issued on or after March 28, 1988.
For those mortgages insured pursuant to firm commitments (or direct
endorsement credit worksheets) issued prior to March 28, 1988, the
Department can continue to request that mortgagees diligently pursue
deficiency judgments against selected mortgagors.  Until recently,
HUD was not authorized to reimburse lenders for the full expense of
obtaining deficiency judgments.  That situation has been rectified by
new regulation 24 CFR 203.402(o), which makes the added costs (which
must be reasonable and customary) of pursuing the judgments 100
percent reimbursable.  HUD strongly encourages mortgagees to
cooperate with requests from Field Offices regarding deficiency
judgments.
 
     The Department has already begun requesting or requiring
mortgagees to obtain deficiency judgments in instances where the
mortgagors are non-occupant owners; have previously defaulted on one
or more FHA-insured mortgages resulting in the payment of claim(s);
or are “walkaways,” having abandoned their mortgage payment
obligations despite their apparent continued ability to pay.  This
will continue to occur where the pursuit of deficiency judgments is
consistent with State law.
 
     HUD will be using data collected by the Department that
identifies mortgagors with two or more FHA-insured mortgages, as
well as information from the single family default monitoring
system.  When these reports are combined, they yield listings of FHA
mortgagors who are by definition non-occupant owners and are also in
a default or pending-foreclosure status (or have already experienced
foreclosure) on one or more FHA-insured mortgage loans.  In addition,
mortgagee monitoring staff outstationed from HUD Headquarters, and
loan management staff in many Field Offices around the country, will
pass along information about prospective subjects for deficiency
_____________________________________________________________________
 
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judgments to the staffer responsible for determining which mortgagors
to pursue.  He or she in turn will contact the mortgagees (first by
telephone, then by follow-up letter) to advise them that HUD is
requesting or requiring them to seek deficiency judgments against those
mortgagors who have been selected for such treatment.
 
     Mortgagees, if requested or required by HUD Field Offices to
pursue deficiency judgments against particular mortgagors, will be
instructed to assign all the judgments they obtain to HUD.  (Model
forms facilitating this action will soon be made available by Field
Offices to mortgagees, along with additional instructions.)
Mortgagees are specifically directed not to engage in collection of
deficiency judgments obtained in connection with any FHA-insured
mortgage, effective immediately.  The Department will utilize various
methods to collect once the judgments are assigned, including
conventional means of pursuing the judgment debtors by HUD personnel,
use of private collection agencies and/or judicial proceedings
initiated by the U.S. Department of Justice, salary or administrative
offset (for active or retired Federal and military personnel), and
Internal Revenue Service (IRS) offset of tax refunds.  Some of these
measures may result in additional fees that are chargeable to the
debtor.
 
     If the judgment debt is declared uncollectible, in whole or in
part, by the Federal Government, the amount of the uncollectible
debt will be reported by HUD to the IRS on Form 1099-G.  Mortgagors
who successfully negotiate compromise settlements will also be the
subject of an IRS information return on Form 1099-G for any
indebtedness “forgiven” by the Government under the terms of the
settlement.  Before the Form 1099-G can be filed, however, the debt
amount must be compromised or declared uncollectible by Federal
administrative procedure, or else the applicable Statute of
Limitations on enforcement of the deficiency judgment must have run.
The Department now anticipates that it will have the necessary
procedures in place for Form 1099-G reporting by the second half of
1989.
 
     The procedure of pursuing a specific mortgagor for a deficiency
judgment can begin in two different ways.  As discussed above, HUD
may request or require the mortgagee to take this action based on
data gathered “in-house.”  Alternatively, the mortgagee can initiate
the process by bringing information to the attention of the local HUD
Office indicating that a mortgagor meets the criteria for pursuit of
a deficiency judgment.  The Department encourages lenders to
communicate the details of serious abuses of which they are aware to
the Loan Management Branch Chief at the appropriate HUD Office.
_____________________________________________________________________
 
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Please note that only where pursuit of the deficiency judgment was
requested or required by the Department, or where HUD has approved a
mortgagee’s request for permission to pursue a judgment, will the
expenses connected with this action be reimbursable when the claim is
filed.
 
     Another noteworthy aspect of HUD’s deficiency judgment
initiative is the Department’s use of the Claims Without Conveyance
of Title (CWCOT) procedure to establish the Commissioner’s Adjusted
Fair Market Value (CAFMV), which is the amount the mortgagee will bid
at the foreclosure sale.  It is the CAFMV, or, if a third party bids
higher, the consummated third-party purchase price, that is used to
establish the deficiency judgment amount when it is subtracted from
the mortgagor’s outstanding indebtedness at the time of foreclosure.
(Refer to Mortgagee Letter 87-20 , dated June 23, 1987, for a full
explanation of CWCOT.)
 
     The Department will be widely publicizing its efforts to counter
abuse of the FHA Single Family insurance programs through the
prosecution of deficiency judgments and by the reporting of
uncollectible and/or compromised amounts to the IRS.  It is hoped
that these initiatives, directed toward investors, repeat defaulters
and “walkaways” will act as deterrents against abuse.
 
     HUD will be issuing a separate Mortgagee Letter in the near
future, which provides instructions on how to include deficiency
judgment-related expenses in claims for insurance benefits.
 
     The cooperation of participating mortgagees is crucial to our
success, and the Department appreciates your commitment to help us
accomplish this objective.  Please feel free to call the Single
Family Servicing Division at Headquarters if you have any questions
on this matter, at (202) 755-7330.
 
                                   Sincerely yours,
 
                                   James E. Schoenberger
                                   General Deputy Assistant Secretary
                                     for Housing
_____________________________________________________________________

Skyrocketing growth in loans from the Federal Housing Administration and Ginnie Mae have helped support the mortgage market — but could leave taxpayers on the hook for massive new losses.

FHA-insured loans have more than tripled from 530,000 in fiscal year 2007 to 1.7 million thus far in 2009. The Government National Mortgage Association, which securitizes FHA loans, has boosted its mortgage-related issuance to $287 billion from $85 billion.

Yet during that same period, the FHA’s loan delinquency rate has climbed to 14.4% in Q2 from 12.6% two years earlier.

Adding to the concern, the FHA’s fund to cover losses has dropped to a projected 3% of insured loans. That’s a leverage ratio of 33-to-1, the level banking giant Bear Stearns was at before it failed.

The government’s own watchdogs have rung the alarm that the FHA is increasingly vulnerable to fraud.

“One of the ways to read the FHA growth is that they are coming back to a more historically ordinary presence in the market,” said Alex Pollock, a resident scholar at the American Enterprise Institute and former president of the Federal Home Loan Bank of Chicago. “But they’re having very rapid growth and they have high loan-to-value ratios and one can certainly imagine scenarios where the delinquencies and losses get serious.”

FHA-backed loans have down payments as low as 3.5% — even as many private lenders have returned to 10% or 20%. Higher loan-to-home value ratios tend to have more risk. FHA borrowers often have poor credit ratings.

But FHA’s delinquencies are still far lower than subprime loans, which have nearly doubled in the past two years to 25.4%.

Traditionally, FHA loans have been safer than subprime. Getting an FHA loan has been more cumbersome. Such loans also had various size limits — now loosened — that kept them out of many overheated housing markets that later crashed.

Also, the FHA encourages the banks it works with to help borrowers stay in their homes.

“Historically, a significant number of FHA mortgages cured themselves — borrowers start making the payments down the road,” added Guy Cecala, CEO and publisher of Inside Mortgage Finance Publications.

But Cecala also noted that those tend to reflect better economic conditions than today. Unemployment, a big factor in delinquencies, now stands at 9.4%.

The collapse of the private mortgage market has meant more business for FHA.

Congress has also pushed the FHA to get more involved by authorizing the $300 billion “Hope for Homeowners” program, intended to help struggling homeowners to refinance — even when they are up to 25% underwater on their homes. Such reworked mortgages have an extremely high failure rate. However, FHA says it has not made many “Hope” loans.

Lawmakers also expanded the FHA loan limit from $625,500 to $729,750.

All that may be leading the FHA into riskier territory. And since the agency enjoys the full faith and credit of the U.S. government, the taxpayer would end picking up yet another tab for any future losses.

Also, the torrid growth may be masking the size of FHA’s current delinquencies.

“Those numbers look lower than they would otherwise because the portfolio is growing fast,” warned Pollock. “As a loan portfolio grows fast, the delinquency numbers look better because you’re adding all these new loans that haven’t had time to go bad yet into the denominator.”

Without those new loans, FHA’s Q2 new foreclosure rate of 1.15% would be nearly 1.5%, according to the Mortgage Bankers Association.

Meanwhile, the “surge in FHA loans is likely to overtax the oversight resources of the FHA, making careful and comprehensive lender monitoring more difficult,” said Kenneth Donohue, Inspector General for the Department of Housing and Urban Development, in testimony before Congress in June.

Donohue noted that heavy loan volume makes the FHA “vulnerable to exploitation by fraud schemes.”

The FHA recently suspended Taylor, Bean & Whitaker Mortgage for suspected fraud. The No. 12 U.S. mortgage lender in the first half of 2009, Taylor recently filed for bankruptcy.

The agency itself, in an e-mail response to IBD questions, acknowledged “some pressure on FHA’s operational environment,” but said “system enhancements and process changes” are agency priorities.

FHA also stressed that it historically has been less prone to fraud than similar private lenders, citing its insistence on full documentation from borrowers.

Donohue also worried that surging FHA volume has “collateral implications for (Ginnie Mae’s) integrity.”

That could have serious policy implications for reform of the secondary mortgage market after the collapse of Fannie Mae (FNM) and Freddie Mac (FRE), which will cost taxpayers hundreds of billions of dollars.

The MBA on Wednesday proposed breaking up Freddie and Fannie into smaller, private entities that would issue a government-backed, mortgage-backed security.

This “CG” security “would be conceptually similar to the Ginnie Mae model,” the MBA’s report said. Indeed, it suggested “Ginnie Mae could potentially take on the responsibilities of the CG.”

Cecala notes that defaults on FHA loans can create headaches for Ginnie Mae investors, even though the FHA covers any losses. A default means a Ginnie Mae MBS gets paid early, causing difficulty for those investors who expected the payments to continue for a number of years.

But Cecala added that he was “not aware of Ginnie Mae investors being concerned” so far.

The default rate for mortgages recently insured by the Federal Housing Administration has been climbing, an alarming trend for an agency that is playing a vastly expanded role in the mortgage market and backing roughly a quarter of all the loans made last year.

About 4.31 percent of the FHA-insured loans made in the two years ending December 31 were at least 90 days late, according to the most recent update of an FHA database designed to help the agency detect problems with its lenders and programmes. That’s the highest in any two-year period since at least 2005.

On a monthly basis, FHA defaults have been rising since summer, according to the Department of Housing and Urban Development, which includes the FHA. Not all defaults result in foreclosure.

The lacklustre performance comes at a time of increased scrutiny of the FHA by federal policy-makers, some of whom question whether the agency can handle its soaring volume of loans and properly vet the lenders who are making them.

Although the FHA is a government agency, it has been self-sustaining since its creation in 1934, meaning no public money has been used to cover its losses. The mortgage insurance paid by the home owners goes into a fund that provides backing on mortgages made by FHA-approved lenders.