Mortgage Fraud Moved From Subprime To FHA
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In a November 2011 Special Report by the Community Development Studies and Education Department, sponsored by the Federal Reserve Bank of Philadelphia — authors John Wackes and Harriet Newburger compare patterns in mortgage lending for the Federal Housing Administration (FHA) to those for the overall mortgage market from 2000 to 2009. As the report indicates, FHA lending peaked in 2000 and 2001, fell to its lowest level in 2005 and 2006, and rose sharply after the housing crisis in 2007.
The FHA, which is a part of the Department of Housing and Urban Development (HUD), provides government backed insurance for residential mortgage loans. The FHA has helped make mortgage credit more widely available by allowing low down payments and low minimum credit scores. Over the past decade, the market share for loans insured by the FHA has fluctuated dramatically. That fluctuation is directly related to the availability of non-government backed credit in the marketplace, specifically the availability of subprime lending.
Subprime lending increased dramatically in 2003 through 2006 — before it imploded in 2007. During that time, mortgage credit was available to borrowers with low credit scores, and there were lower underwriting standards. FHA loans became less attractive and the market share for FHA loans decreased. But when the subprime market imploded and with the tightening of lending criteria, FHA lending experienced a resurgence. Along with that resurgence, mortgage fraud, which helped implode the subprime market, came along with it.
As the FHA market share has grown, there have been rising delinquencies. There are many factors that may play a role in the rising delinquencies, including unemployment rates and housing market conditions. Mortgage fraud, in my opinion, is also playing a key role.
I have been an attorney since 2003 and have focused my practice primarily on mortgage fraud. Having represented lenders, investors, and mortgage insurance companies, I have reviewed thousands of loan files and have uncovered multi-million dollar mortgage fraud schemes. Mortgage fraud did not become a widely known term until the implosion of the housing market, but it has been around for a long time and will continue to as long as a housing market exists. The only things that change are the fraud schemes and the vehicles (loan programs) to commit the crime. Now that subprime lending is virtually non-existent, the fraudsters have turned to government backed loan programs, including the FHA, to make money. Recent settlements by large lending institutions highlight the problem.
On February 10, 2012, HUD announced a $1 billion dollar settlement relating to mortgage fraud by Bank of America (B of A) against the FHA. HUD accused B of A of knowingly making loans to unqualified borrowers and originating loans based on inflated appraisal values. As per the article, the FHA program itself allows authorized lending institutions to “bend the FHA rules to approve unqualified applicants….” I have to disagree with the last sentence in the article stating that FHA mortgage fraud should decline dramatically since many of the notoriously fraudulent FHA lenders have been expelled. As long as the vehicle exists, the fraudsters will find a way to use it to their advantage.
Flagstar Bank recently acknowledged a settlement of a fraud claim with the Department of Justice (DOJ) over underwriting practices as an FHA originator. The settlement is in excess of $130 million dollars and “focuses on allegations by the [DOJ] against Flagstar, in which the government claims that… [Flagstar] may have improperly approved mortgage loans to be insured by the FHA.”
In today’s market, the FHA has a disproportionate share of the market compared to year’s past. Increased delinquencies provide concern over the program’s long-term viability. Although mortgage fraud is not the only factor giving rise to those delinquencies, it is playing a role. And, as long as the vehicle exists, fraudsters will continue to use it as a tool to commit the crime. Mortgage loan originators need to be more vigilant in detecting fraud through audits – to head off fraud before it happens.
How much fraud will we be paying for when taxpayers end up bailing out the FHA?