Marketplace Scratch Pad

Housing insanity

Scott Jagow Jan 13, 2010

The government has sent subpoenas to 15 mortgage lenders who do business with the Federal Housing Administration. These lenders have one particular thing in common — extremely high default rates on FHA-backed loans. Considering the government’s current housing strategy, a more appropriate response to these defaults would be for the housing department to investigate itself.

More on the lender subpoenas from the Washington Post:

Each firm raised suspicion because its default rate was at least twice the average of peers in their area. Together, they originated about 100,000 FHA-backed loans in the two-year period ended Nov. 30 and the FHA paid claims on roughly 12,000 of them, according to a federal database.

Here’s how Housing and Urban Development inspector general Kenneth Donohue explained what’s going on:

“The FHA market share has skyrocketed,” Donohue said. “Our job is oversight; we work for the American taxpayer. We want to send a message to the industry that as the mortgage landscape has shifted we are watching very carefully and that we are poised to take action against bad performers.”

But Mr. Inspector General, do you understand why the FHA market share has skyrocketed? It’s because the government has tried to prop up the housing market by making an unconscionable amount of loans to people who have to put almost nothing down and who are immediately drowning their finances with a mortgage payment. Don’t you remember how we got into this mess in the first place???

This was the response from Richard Reese, president of Dell Franklin Financial, one of the lenders under investigation:

While all the loans adhered to HUD and FHA rules and specifications, Reese said some didn’t pan out – and he noted that for small lenders, it takes only a few soured loans to push them into “underperforming” category.

“We certainly don’t believe that there’s any wrongdoing,” said Reese. “I think we’re just a victim of the economy.”

I’m sure the loans are fine according to the FHA and HUD specifications. But those specifications are the problem. Mr. Reese, you’re not a victim of the economy. You’re a willing participant in the government’s housing insanity.

Here’s HUD’s online commercial:

How do we do it? The Federal Housing Administration (FHA) – which is part of HUD – insures the loan, so your lender can offer you a better deal.

  • Low down payments
  • Low closing costs
  • Easy credit qualifying

Does any of this sound familiar? I’m not talking about HUD six years ago. This is what is on the HUD website right now.

More from The Wall Street Pit:

Down payments are as low as 3.5%, and the more distressed the area, the higher the FHA percent of the market. This is clearly madness. The FHA insures $675B of mortgages. These loans are packaged with others and run through Ginnie Mae. When this mess blows up, the taxpayer will be on the hook.

Barney Frank justifies the horrifically high percent of bad loans as “policy” to keep housing from falling faster! Is he that big a fool?

Decide for yourself. Six years ago Frank said: “I want to roll the dice a little bit more in this situation towards subsidized housing.”

Recently he said: “I don’t think it’s a bad thing that the bad loans occurred. It was an effort to keep prices from falling too fast.”

And it’s the mortgage lenders who need to be investigated?

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