It used to take several years for the Federal Housing Administration to track down its worst lenders and put a stop to their shoddy lending practices. Not any more.
During 2010, FHA re-engineered its post-endorsement loan review procedures and now believes it can detect bad loans eight months after origination. “FHA has the processes and controls in place that can catch poor underwriting and fraud early—not two or three years down the line,” said Vicki Bott, who oversees the agency’s single-family program.
“That is a very important message to send to the industry that FHA can identify early in the process fraud and unacceptable underwriting,” Bott said in an interview with National Mortgage News.
The Department of Housing and Urban Development deputy assistant secretary noted that the FHA is targeting every loan where the borrower has missed three payments in the first six months. (Such loans comprise 40% of the high-risk loans currently undergoing post-endorsement reviews.)
If fraud or poor underwriting is detected, the FHA tags the loan for indemnification, which means it will not pay the lender’s claim if the loan ends up in foreclosure. Early detection also puts pressure on lenders to change their behavior and take corrective actions.
The FHA has been under pressure from HUD’s Office of Inspector General to conduct reviews of defaulted loans where the FHA has already paid claims.
In January 2010, the HUD IG launched “Operation Watchdog” to review a loan sample at 15 FHA-approved lenders with high default rates. At each company, OIG auditors selected up to 20 loans that had defaulted within 30 months of origination.
Of the 284 loans reviewed, the OIG found that 140 did not meet FHA underwriting standards. Borrowers on 100 of the 140 loans made only six payments or fewer before defaulting.
In its final report on Operation Watchdog, the OIG said the audit uncovered “systemic problems” when it comes to lenders improperly certifying compliance with FHA due diligence and underwriting requirements.
“Further, HUD did not have a formal process established to review all (high-risk) claims paid on defaulted mortgages,” the OIG report says, “resulting in unrecovered losses to the insurance fund for loans that never should have been insured.”
FHA officials maintain they have limited resources and believe it is more productive to catch bad underwriting early.
“It is extremely important from an industry standpoint to change current behavior vs. addressing things that happened two or three years ago,” Bott said.
She noted that most of lenders audited by the OIG “don’t exist anymore—so there’s no money to go after.”
Among the 15, the HUD Mortgage Revenue Board terminated the right of First Advantage Mortgage LLC, Lombard, Ill., to make FHA loans in July, levying a $60,000 civil money penalty against the firm. It also ordered indemnification for $325,000 in loan losses.
Seven other lenders were terminated by HUD or they voluntarily surrendered their FHA Eagle. Six others are listed as active lenders, but several stopped making FHA-insured mortgages over 12 months ago.
