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Tess Vigeland: A few weeks ago we reported that if you were looking to buy a new home, and you didn’t have the 20 percent down payment or great credit, you might try the FHA. That’s the Federal Housing Administration; a government agency that insures mortgages. And if the name sounds like a Depression-era holdover, that’s because it is. Originally it was meant for people who couldn’t get a conventional loan. And since the subprime crisis, it might just be the best option out there. You prove you can make the payments. You pay a premium, and the government insures your loan. But, as reporter Amanda Aronczyk found out, there are still lots of reasons to be cautious.
Amanda Aronczyk: A few years ago, Amy Moore gave up her hopes of ever owning a home. It was just too expensive. But as the housing market tanked, she decided to call up a realtor friend.
Amy Moore: And I was just shocked that for the first time since I’ve lived in Orange County there was actually stuff on the market that was not only affordable, but desirable. You know, places you would actually want to live!
A few deals fell through, but then it happened.
Amy Moore: Actually just closed last week on a condo. It was absolute hell, but I managed to finally complete one.
The condo was going for about $300,000 and Amy didn’t have much saved for a down payment. She figured she could put down about 10 grand. So her broker suggested she get an FHA-insured loan. These days, that’s the advice of many brokers around the country.
Kevin Weaver: Right now almost anybody who has less than 20 percent down is automatically being looked at for an FHA loan first.
Kevin Weaver is a mortgage broker in Cincinnati. He says that as the sub prime market imploded, his clients found it nearly impossible to get conventional loans. The FHA-backed mortgages were once the loan of last resort. Now they account for almost one-third of all new mortgages. And according to Guy Cecala, publisher of Inside Mortgage Finance, the FHA isn’t ready for all this attention.
Guy Cecala: It’s an agency that basically was staffed up for a 2 percent market share and there’s been no increase in staffing or resources now that it has a 31 percent share of the mortgage market.
So they have way more business, but no additional staff.
Cecala: FHA is under a lot of pressure to do more with less and they don’t really have the capability to monitor thousands of brokers on a daily basis.
It’s inevitable that people will take advantage of the situation. That’s according to Kenneth Donohue. He’s the inspector general who oversees the FHA.
Kenneth Donohue: The people in the subprime industry that have been able to elude detection, this is the business they’re in.
And it was a lucrative business while it existed. For a lot of people.
Donohue: Fraud is a conspiracy. It involves appraisers, the lenders, the brokers, the attorneys. So often what you’ll find is that it’s a natural process to go from one area to another that they feel they can focus on. The business at hand today is FHA.
As a result of this growing concern, the inspector general says that the FHA is staffing up. They’re partnering with the FBI to investigate fraud. But consumers still need to be vigilant. Go with a broker you know and trust, he says. Just seeing the FHA seal of approval is clearly not enough.
In New York, I’m Amanda Aronczyk for Marketplace Money.
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