The Wall Street Journal reports today that 7.5 percent of FHA loans were "seriously delinquent" at the end of February, up from 6.2 percent a year earlier. If a loan is categorized as seriously delinquent, it means that it is 90 days or more overdue. But some of these loans are going into default after just one payment or without a single payment ever being made, so some suspect fraudulent lending activity.
FHA has become lender of last resort for people who used to be served by the subprime market before it collapsed. If you want a mortgage loan with a down payment of just 3.5 percent, FHA-guaranteed loans are your only option. And you likely will need to turn to an FHA-guaranteed loan if you have less than stellar credit. FHA doesn't actually lend money, it provides mortgage insurance to FHA-approved lenders. FHA's share of the mortgage market is now nearly one-third of all new loans, up from just two percent in 2006.
The Washington Post found that in the past year, the number of borrowers who failed to make more than a single payment before defaulting on an FHA-backed mortgage nearly tripled, outpacing the growth in new loans. Industry experts told the Washington Post that this rapid increase in the default rate is due to the weak economy, lax scrutiny of prospective borrowers, and foul play among unscrupulous lenders looking to make a quick buck. Kenneth Donohue, the inspector general of the Department of Housing and Urban Development, told the Post that if a loan "is going into default immediately, it clearly suggests impropriety and fraudulent activity."
During the subprime lending boom, mortgage brokers and small lenders milked the market for commissions and fees by making loans without worrying about whether the loan would ever be repaid. Based on the numbers the Washington Post uncovered, it appears some of those same unscrupulous lenders are back in business using FHA-guaranteed loans. The Post found that 9,200 loans insured by the FHA in the past two years have gone into default after no payments or after only a single payment. By last fall, more than two dozen FHA home loans were defaulting on average every day, seven days a week.
The big problem is that the FHA office responsible for approving and policing new lenders has not expanded, yet the number of active lenders doing business with the FHA has more than doubled to 2,300 in just two years. Experts believe the FHA does not have the staffing or technology to keep up with the large level of growth in new lenders.
William Apgar, who is a senior adviser to the HUD secretary, told the Post that he agrees these early defaults are a worrisome sign. He told the Post, "We have to make sure people don't scam the system, and when they do, they are held accountable."
One of the big problems appears to be creative use of the FHA's "streamlined" refinancing, where established FHA borrowers get lower rates without verifying income. Unscrupulous lenders coax homeowners to repeatedly refinance as a way to avoid making payments. The lenders make money on every refinance so they don't care whether the borrower can pay.
Experts are calling for the FHA to crack down on what appears to be the worst of subprime lending practices now overtaking the FHA, which was created during the Depression-era to assist borrowers who otherwise would not qualify for a traditional mortgage loan. During the subprime lending boom, few turned to the FHA, but now the FHA appears to be the agency of first resort for subprime lenders who might otherwise be out of business.
Lita Epstein has written more than 25 books, including The 250 Questions You Should Ask to Avoid Foreclosure.