The last time the housing market was this bad, Congress set up the Federal Housing Administration to insure Depression-era mortgages that lenders wouldn’t otherwise make.
This decade’s housing boom rendered the agency irrelevant. Americans raced to aggressive lenders, seduced by easy credit and loans with no upfront costs. But the subprime mortgage market has crashed and borrowers are flocking back to the FHA, which has become the only option for those who lack hefty down payments or stellar credit. The agency’s historic role in backing mortgages is more crucial now than at any time since its founding.
With the surge in new loans, however, comes a new threat. Many borrowers are defaulting as quickly as they take out the loans. In the past year alone, the number of borrowers who failed to make more than a single payment before defaulting on FHA-backed mortgages has nearly tripled, far outpacing the agency’s overall growth in new loans, according to a Washington Post analysis of federal data.
Many industry experts attribute the jump in these instant defaults to factors that include the weak economy, lax scrutiny of prospective borrowers and most notably, foul play among unscrupulous lenders looking to make a quick buck.
If a loan “is going into default immediately, it clearly suggests impropriety and fraudulent activity,” said Kenneth Donohue, the inspector general of the Department of Housing and Urban Development, which includes the FHA.
The spike in quick defaults follows the pattern that preceded the collapse of the subprime market as some of the same flawed lending practices that contributed to the mortgage crisis are now eroding one of the main federal agencies charged with addressing it. During the subprime lending boom, many mortgage brokers and small lenders milked the market for commissions and fees by making as many loans as possible with little regard for whether they could be repaid.
Once again, thousands of borrowers are getting loans they do not stand a chance of repaying. Only now, unlike in the subprime meltdown, Congress would have to bail out the lenders if the FHA cannot make good on guarantees from its existing reserves. And those once-robust reserves are showing signs of stress, raising the possibility that taxpayers may have to pick up the tab for the first time since the agency was established in 1934.
Technorati Tags: real estate, real estate marketing
Paul Francis, CRS says:
Hey Greg,
So.. Let me get this straight…I can get this type of loan… rack up $100,000 on my plastic and then get a BK judge to modify my home loan to something I can afford?
SWEET!
March 9, 2009 — 1:37 am
Sean Purcell says:
What a hatchet job. The lesson here, of course, is that banks are good, brokers are bad. Nice load of crap.
This article references no reliable statistics or backs its claims with even base line numbers. It does not even pass the smell test. Getting loans done right now is a bitch. Is there anyone out there having an easy time of it? Anyone out there putting people into loans that can’t even make the first payment? We have to promise the first born on clients with 740 scores, full income documentation and 20% down. There is nothing easy in the lending world right now.
If there is any truth to the contention in this article that no-pay defaults are increasing at an above average rate, I would bet dollars to donuts it’s tied to the loan mod programs the FHA was forced to back. Otherwise, there is no evidence for anything implied in this piece of propoganda.
March 9, 2009 — 8:26 am
Mark Madsen says:
Good point, Sean. On a similar note, one of the benefits we’ve had with our FHA business is that there is a Quest Diagnostics in the same office complex as our mortgage company. This just makes it more convenient for our clients who have to give blood samples as part of their underwriting guidelines. We actually just included the medial / insurance release forms with our 1003. I’m also looking to hire an RN with processing experience to help streamline our systems a little.
March 9, 2009 — 11:16 am
Scott G says:
For someone that has recently lost their job and they had no idea that it was going to happen shortly after getting a loan I can see how this would be frustrating. People are losing their jobs and people are defaulting on their loans early on. It’s a recession and hopefully this rollercoaster ride for professionals in the industry and the American people will be over soon!
March 9, 2009 — 5:37 pm
James Boyer says:
There has to be a way to plug this hole for everyone but the people who have a legit issue come up, such as a death, severe illness, or new job loss. Otherwise make it a jail-able offence to default on a home mortgage in the first 6 months.
March 11, 2009 — 2:50 pm
Mike McC says:
Seems to me that if the lender feels there was fraud involved that they report that to the IRS who then leins back the taxpayer for the paid-out tax credit.
March 12, 2009 — 9:14 am
Michael Cook says:
I do like the jailable offense, but I dont think it should be limited to six months. The trouble with the carrot vs. the stick approach is achieving the end goal. If the end goal is to maximize homeownership, that would be a bad idea. If its to make us a more responsible society, I think its a good idea.
I would also add that the banks who lend to us would have to be held to a much higher standard then they are currently. Brokers as well.
March 12, 2009 — 10:14 am
Brad Yzermans says:
Did someone just say what I think they said? That buyers are getting into loans they have no chance of repaying? We all know that every approval is being highly scrutinized and more difficult. If someone is getting an FHA loan with a 43% DTI they have more than enough money to pay their mortgage. maybe it would be more appropriate to say that buyers are getting loans that have the ability to pay but choose not to.
March 14, 2009 — 1:21 pm