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FHA ‘Zero Pay’ Defaults Rising

The FHA is experiencing “a large number of zero payment defaults” in which borrowers fail to make even one payment on their new government-insured mortgages, a Department of Housing and Urban Development official said at the Mortgage Bankers Association’s annual National Fraud Issues Conference in Las Vegas.

The trend, which Lisa Gore, the assistant special agent in charge of the criminal investigation division in HUD’s Inspector General’s office, called “a huge red flag” that some type of fraud has been committed, is similar to the one experienced in the 1999-2001 housing market turndown.

Ms. Gore’s remarks confirm a front page Washington Post report earlier this month that many FHA borrowers are defaulting as quickly as they close. The newspaper’s analysis of FHA data found that more than 9,200 loans insured by the agency in the past two years have gone delinquent with either one payment or no payments being made. The analysis found that the pace of what the Post called “instant defaults” has tripled in the last year, and more than two dozen loans are defaulting in this manner every week, the newspaper reported. Ms. Gore said the IG’s office has stepped up the number of investigations into the “large number” of these and other cases of possible fraud. One investigation involves “more than 100 loans,” she told this publication.

At a separate regional MBA conference held in Atlantic City, N.J., a Freddie Mac representative told attendees there that early payment defaults for recently originated loans purchased by Freddie Mac are higher than what it expected to see.

Tracy Mooney, vice president, single family credit management, said the company is intensely focused on realigning its credit parameters, specifically addressing high loan-to-value ratio loans, excessive layering of risk, no or low document products and high risk product types.

The problems with EPDs are driven by underwriting and/or collateral defects, she said. There are errors with income and debt obligations, reserve requirements are not being met and the borrower has insufficient funds to close. The company is also seeing loans exceeding the maximum loan-to-value ratio. These are both retail and third party originations.

Therefore, in 2009, Freddie Mac is focusing on the manufacturing process, looking for improved accuracy on collateral valuation and having a heightened focus on quality control, Ms. Mooney said. But also, Freddie Mac heard its customers “loud and clear” when they told the company it was not easy to do business with, she said.

It is not an overnight fix, but Freddie Mac’s focus for the year is to provide clear guidance on what it will and will not purchase.

Fannie Mae senior vice president, single-family mortgage business Zach Oppenheimer, started his presentation with a little history lesson. He started with the company in 1983 when the economy was just coming out of a recession with high unemployment, the thrift crisis was just taking root, interest rates of 15% and home sales cratering.

There was plenty of angst before the economy slowly recovered. Times are tough right now, but Fannie Mae will serve this market and look to capitalize on every opportunity out there, Mr. Oppenheimer said.

The company has been hit hard by the collapse of the housing market but it now has a government mandate to aid the recovery and act as a financial backstop. He said this puts Fannie Mae in a position to help customers.

He said he was optimistic about the future because of the twin pillars of President Obama’s plan to stabilize the market and prevent foreclosures; there are now affordable interest rates; and the demand for housing is starting to build and will start to tap the inventory. “Our goal is to make the administration’s plan a success,” Mr. Oppenheimer said.