How Co-Signers of Soured FHA Loans Turn Around and Get New Ones
When reporting defaults and claims on government-insured single-family mortgages, the Federal Housing Administration identifies the primary borrower to a government database, but rarely provides the names of the co-borrowers.
This omission can give the second or third signers on a defaulted loan easy access to a new FHA-insured loan, warn auditors at the Department of Housing and Urban Development Office of Inspector General.
In one case, FHA, which is part of HUD, paid a claim on a loan and a co-borrower took out a new FHA loan 19 days later as the primary borrower, the auditors found.
This has happened scores of times. For the fiscal year that ended in September, "FHA insured 63 new loans totaling $9.5 million although the borrowers had recent claims," the OIG report says.
FHA should report co-signers to the federal government's Credit Alert Verification Reporting System, known as CAIVRS, the OIG auditors contend. (Lenders are expected to check the CAIVRS database to ensure defaulted federal debtors don't get new government-backed loans.)
In a written response to the inspector general's report, FHA said it agreed with that recommendation.
The OIG auditors also want CAIVRS reporting of delinquencies on FHA-insured loans. But HUD pushed back on that recommendation.
The agency disagrees with the notion that a delinquency on a FHA-insured mortgage is a delinquency on federal debt, FHA says. "With respect to when a borrower is delinquent on his or her mortgage payment, the borrower owes the delinquency to the lender, not the Federal government, and so the delinquency on an FHA-insured mortgage is not a federal debt."
An FHA spokesman would not discuss this disagreement between FHA and the OIG.
The federal mortgage insurance agency reminded the OIG auditors that FHA requires its servicers to report delinquencies and defaults to credit bureaus. And lenders are required to analyze a prospective borrower's credit history.