HUD INSPECTOR GENERAL PROBES MORTGAGE COMPANIES WITH SIGNIFICANT CLAIM RATES
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.
Source: HUD
This looks like reform, but it is really just extortion. If FHA wanted to curtail risk to the FHA program, FHA would tighten underwriting guidelines and increase oversight. FHA has allowed traditional FHA underwriting standards to be disregarded through automated underwriting via FHA TOTAL Scorecard.
FHA TOTAL Scorecard cannot be relied upon to produce sound quality decisions that result in sustainable loans. FHA TOTAL Scorecard has consistently produced approval recommendations on extremely risky loans with excessive debt-to-income ratios. I’ve personally seen debt to income ratios into the 50′s with little or no compensating factors. Although FNMA has decreased maximum debt-to-income ratios on most loan products, FHA has failed to follow suit.
Even worse yet, HUD has proposed to eliminate broker oversight, and has increased deregulation through Lender Insurance, and delegating builder and construction approvals to lenders.
The Credit Watch Initiative is statistically flawed, as growth in new lenders and increased FHA production has diluted delinquency and compare ratios. Simply put, lenders who have been originating loans the longest and have the least amount of new loan production to dilute their statistics have the the highest compare ratios. Conversely, lenders who are new to FHA or have the highest concentration of new loans have lower compare ratios.
Loans from 2007 have higher default rates than loans originated in 2009. This is because the economy has significantly retracted since 2007, and declines in property values have been more significant for borrowers who acquired homes in 2007 vs. 2009. The default and delinquency rate for FHA 2007 vintages is above 30%; the default and delinquency rate for 2008 vintages is slightly over 20% (per FHA). Yet the national compare ratio is only 5.05%. (Note: national compare ratio only includes loans that had a 90 day delinquency during the most recent 24 month period). The national compare ratio doesn’t make a whole lot of sense when you consider that the combined default and delinquency rate on FHA’s total portfolio is over 23% (Per HUD Neighborhood Watch data).
My problem with FHA and Stevens is that rather than reform the FHA program to curtail risk, FHA is instead seeking recourse from lenders. Some lenders may simply have a high default rate because of the economy and/or the unsound FHA underwriting guidelines that they adhered to.
HUD has already shut down a few companies resulting in hundreds of millions in losses to financial institutions and agencies. Furthermore, the company closures have cost over 2,500 Americans jobs. Other companies were allowed to pay substantial penalties to remain in business.
I don’t have a problem with FHA taking action to protect the FHA Insurance Fund. And I don’t have qualms with FHA obtaining subpoenas. I do have a problem with FHA making a show out of it and issuing press releases that harm business reputations and relationships. The companies end up getting tried in the court of public opinion whether or not they’ve done anything wrong. Companies could get their warehouse lines pulled by nervous banks.
FHA’s actions must be closely examined to ensure that small businesses receive due process.
Ameriquest Mortgage Co. involvment with Mortgage Electronic Recording System. is the Ceo. of both or the Co.s one in the same? how is it that MERS can transfer a Mortgage without involving a Title Office ? What are the home owners rights to prevent a forclosure if the current servicer will not work with them?