Loan Modification

Criminal Records & FHA Mortgages

By Peter G. Miller

The Washington Post tells us that “documents and interviews reveal that more than 34,000 home loans have been issued over the past two years by a dozen FHA-approved lenders that have employed people who were convicted of felonies, banned from the securities industry or previously worked for firms barred by the agency.” (See: Executives with criminal records slip through FHA crackdown, documents show, September 10, 2010)

The Post adds that “more than 3,000 of those loans, about 9 percent, were seriously delinquent or already a claim on the FHA insurance fund as of June 30. That’s nearly triple the rate for all loans made by FHA lenders over the past two years, about 3.4 million.”

I don’t like to be a contrarian, but there are several things about this story which I find perplexing.

Let’s start with that 9 percent foreclosure rate. You have to ask the question: Where are these lenders located? If they’re in North Dakota then I understand that we may have a problem. But what if they’re in Las Vegas, Miami, California, Phoenix and Detroit? Then, maybe, they have a minimal or even below-average foreclosure rate.

What about lenders in general. Do private-sector lenders ever employ individuals with criminal backgrounds? How many? What’s the foreclosure percentage? Where are they located? Is the foreclosure experience in the private sector higher or lower than the experience with FHA loans? Or is it ONLY the FHA program that involves individuals with criminal records?

The Post was able to identify several FHA-lenders that it alleged had questionable pasts. But is this a big problem or a little problem? The FHA loan program now represents about 30 percent all new loans in the country and about 20 percent of all refinancing. Does anyone really think it’s possible to have such a huge program without concerns and questions?

Besides, 34,000 loans out of 3.4 million is 1 percent. Of that 1 percent, roughly 31,000 loans were not foreclosed. Of the 2,000 or so that were foreclosed (that 9%) you might expect that 700 or so would be lost in today’s market regardless of who originated them. That leaves about 1,300 loans out of 3.4 million. A concern, but not much of a concern.

A Real Crime

Rather than worry about obtaining FHA perfection, why is it not criminal to shunt people into high-cost subprime loans when they qualify for conforming financing? High-cost financing for better-qualified borrowers creates an unnecessary and unfair economic burden and a greater propensity for foreclosure.

Think it doesn’t happen? The Wall Street Journal discovered that 55 percent of all subprime borrowers in 2005 actually qualified for conventional financing. The percentage increased to 61 percent in 2006. (See: Subprime Debacle Traps Even Very Credit-Worthy, The Wall Street Journal, December 3, 2007)

And how many people who sold over-priced loans which resulted in needless foreclosures went to jail? How many lenders who created toxic loans are now serving time? Look at the harm and damage done to families, neighborhoods and the national economy.

I look forward to the Post’s coverage.

Full post as published by FHA Mortgage Guide on September 13, 2010 (boomark / email).