The risky part of FHA insurance

TEXT OF STORY

Renita Jablonski: In the past two years, the Federal Housing Administration has captured a huge chunk of the mortgage market. Today, FHA insurance guarantees 1 in every 3 mortgages in the U.S. But as Marketplace's Steve Henn reports, the agency's rapid growth poses some risks.


Steve Henn: Until recently, South Florida TV sets blared unbelievable condo deals.

Condo Ad: Zero down payment, zero closing costs . . .

And Great Country Mortgage promised to make buying a condo in Palm Hill easy.

Condo Ad: No credit? Bad credit? No problem -- guaranteed.

And the Federal Housing Administration guaranteed many of these loans.

Brian Chappell: FHA's business has exploded.

Brian Chappell is a former FHA employee, and now a consultant. He says last year, the Federal Housing Administration approved tens of thousands of new mortgage brokers. These brokers pay a thousand-dollar fee and agree to abide by the FHA's lending practices. Then the FHA insures the loans they create. That lets the brokers sell their loans to major banks, and if a homebuyer defaults, the FHA pays off the tab.

In 2008, FHA insurance made more than 1.6 million new mortgages possible.

Chappell: It's gone from roughly a 3 percent market share in 2006 to now it's probably more than a third of all loans made in America.

FHA loans are propping up what's left of the real estate market. But Gary Lacefield, a former mortgage fraud investigator, says the FHA's explosive growth has attracted many of the worst subprime lenders in America.

Gary Lacefield: Matter of fact, several of these companies are banned from certain states, yet they've been able to go out and get their FHA approval so that they can continue to broker loans.

Remember Great Country? Nearly two-thirds of their loans defaulted in less than two years. This will cost the FHA millions.

Lacefield says the agency isn't scrutinizing new lenders properly -- and already the FHA's insurance reserves have taken a multibillion-dollar hit. Its default rate is rising.

Lacefield: Hell, I expect it to be off the charts.

FHA officials say they aggressively police fraud, have shut down Great Country, and are beefing up oversight. Still, lots of analysts say within a year, the FHA could need a multibillion-dollar bailout of its own.

In Washington, I'm Steve Henn for Marketplace.

About the author

Steve Henn was Marketplace’s technology and innovation reporter for the entire portfolio of Marketplace programs until December 2011.

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