Thursday, January 21, 2010
by Broderick Perkins
© 2009 DeadlineNews.Com
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Deadline Newsroom - The Feds are going after mortgage companies with questionably high rates of foreclosures on homes they finance.
This week, U.S. Department of Housing and Urban Development (HUD) Inspector General Kenneth M. Donohue and Federal Housing Administration (FHA) Commissioner David H. Stevens announced an initiative to target mortgage companies with significant claim rates against the Federal Housing Administration mortgage insurance program.
Mortgage insurance is paid by borrowers, but protects lenders with cash benefits should the borrower default. When lenders foreclose against homeowners with the coverage, it triggers mortgage insurance benefits for lenders to help them bail out.
The investigation was initiated after FHA Commissioner, David Stevens, became alarmed by the incidence of claims against the FHA insurance fund by a number of poor performing companies who had also reached out for federal assistance.
HUD's Office of Inspector General (OIG) served subpoenas 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.
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
The Feds are being applauded for going after mortgage lenders who may have contributed to the housing crisis by writing bad loans, but they are also criticized for not examining their own underwriting standards which some say could prolong housing's woes.
"While the FHA should be commended for its vigilance in trying to detect patterns of fraudulent origination and underwriting practices, it is also critical to the risk management process that the actual underwriting guidelines, set in place by FHA, be thoroughly examined as well," said Nancy Osborne, chief operating officer of Erate.com, a Santa Clara, CA-based financial information publisher and interest rate tracker.
"Taxpayers are backing (federally insured) mortgages that have been referred to as "the new sub-prime," with good reason, because they have taken on the role of insuring these risky low down payment loans where a borrower has far too little "skin in the game,' " Osborne added.
The probe comes at a time when the FHA mortgage insurance program represents a significant percentage of mortgages written in the nation.
"That the FHA continues to require such a small down payment, of only 3.5 percent, certainly flies in the face of sound risk management practices in light of everything we've learned in the past few years," Osborne said.
Options available to the HUD OIG are audits, investigations, inspections and evaluations. HUD can also levy administrative sanctions such as suspensions, limited denial of participation, debarment, and civil monetary penalties. The U.S. Department of Justice (DOJ), state and local law enforcers can pursue civil and criminal legal actions against any wrongdoers.
"The FHA market share has skyrocketed," said Donohue.
"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," he added.
Stevens said additional policy steps, to be announced later this month, are underway to hold FHA lenders accountable for high rates of default
"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," Stevens said.
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Broderick Perkins, an award-winning consumer journalist, parlayed 30 years of old-school journalism into a digital real estate news service, the San Jose, CA-based DeadlineNews Group, including DeadlineNews.Com, a real estate news and consulting service and Web site, and the Deadline Newsroom, DeadlineNews.Com's news back shop.
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