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Housing Agency Flexes Muscle As Loan Defaults Grow

By Tamara Keith

Published November 4, 2009 12:01 AM

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The Federal Housing Administration has been a lifeline for the housing market in the past year. The program of federally insured loans is now responsible for about one-third of new mortgages — 10 times what it was just a few years ago.

But the program has a problem: As its market share has grown, so has the rate of defaults on its loans. FHA is now focusing its attention on lenders offering its mortgages whose default rates are higher than the norm.

And there are plenty of them. Experts say there are more than 900 small lenders with unacceptable failure rates.

"The FHA business has been like a magnet for smaller lenders looking to carve out niches in loans that have lower down payments and slightly lower underwriting requirements," says Guy Cecala, publisher of Inside Mortgage Finance.

Carving Out A Niche

FHA loans only require 3.5 percent down, and credit score requirements are flexible. Some lenders are taking full advantage of that flexibility. It reminds Cecala of the subprime mortgage market of the past.

"In the current mortgage market environment, where we kind of have plain vanilla mortgages, there's not a lot of opportunity for the small 'entrepreneurial' company who wants to make a niche for themselves in the mortgage market," Cecala says. "FHA is one of the only avenues still left."

The days of "if you can breathe, you can get a loan" are over. But it might be hard to tell from watching some of the ads out there.

In one ad from a company called Premium Capital Funding LLC, also known as Topdot Mortgage, a pitchman says, "We're authorized by the federal government to offer FHA loans to homeowners with less than perfect credit ... and your credit score may not even be a factor."

According to housing administration data, Topdot's loans issued over the past two years have defaulted at nearly 2 1/2 times the national average. In some cases, the borrowers never made a single payment.

FHA Commissioner David Stevens says a rate like that is "very bad." He wouldn't comment on specific companies, including Topdot. But Stevens says any FHA lender whose default rate is more than 150 percent of the norm has a problem.

"An institution that has that high a compare ratio is something that would be very concerning to me and would be one that we're looking at more closely going forward," he says. "And if they don't perform at the levels we would expect and that the taxpayers would expect, we need to make sure that they either improve or they get out of the program."

In a statement, Topdot's attorney, Andrew Pennacchia, says the company is committed to making FHA loans in accordance with the Department of Housing and Urban Development's guidelines.

"We have taken a proactive approach to improving the performance of our FHA loan portfolio by adopting more stringent credit guidelines and identifying those factors which have adversely affected the performance of our FHA loans," he says.

FHA Enforcement

When Stevens says a company needs to improve or get out of the program, he's serious. The housing administration recently helped shut down one lender.

Now, the Justice Department is seeking an injunction to prevent another lender, Ideal Mortgage Bankers, from making loans insured by the FHA. The company, which also goes by the name Lend America, has issued more than 11,000 FHA loans in the past two years. The complaint alleges that Lend America fraudulently certified more than $14 million in loans that didn't actually meet FHA lending requirements. Lend America is fighting it.

"We look forward to continuing our partnership with HUD and our mission of providing affordable financing for those borrowers in need," the company said in a statement.

The housing administration has always had the tools to go after problem lenders. But they really didn't have the will to do that until recently, says Brian Chappelle, a partner with Potomac Partners, a mortgage consulting firm in Washington, D.C.

"The message that's being sent is that there's a new sheriff in town at FHA, and that they are going to pursue investigations to see just what the causes are for these high default rates," he says. "In the past, I don't think a lot of people felt that they really had anything to worry about if they had a high default rate."

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View audio transcript

RENEE MONTAGNE, host:

With the housing market in turmoil for the past year, the Federal Housing Administration, or FHA, has come to the rescue of many. It's now responsible for about a third of new mortgages, 10 times more than just a few years ago. And as the federally insured loan program has grown, so has its rate of defaults. The FHA is expected to acknowledge soon that its insurance reserves have slipped below a critical threshold. NPR's Tamara Keith reports.

TAMARA KEITH: Not everyone can get a mortgage anymore. The days of, if you can breathe, you can get a loan, are over. But it might be hard to tell from watching the ads that are out there.

(Soundbite of television commercial)

Unidentified Man (Announcer): ?mortgage bank. We're authorized by the federal government to offer FHA loans to homeowners with less than perfect credit.

KEITH: This ad comes from a company called Premium Capital Funding, LLC. It goes by the named Topdot Mortgage.

(Soundbite of television commercial)

Unidentified Man (Announcer): ?and your credit score may not even be a factor. Applying is easy. Call then number on your screen?

KEITH: According to FHA data, over the last two years, Topdot's loans defaulted at nearly two and a half times the national average. In some cases, the borrowers never made a single payment. FHA commissioner David Stevens says any FHA lender whose default rate is more than 150 percent of the norm has a problem.

Mr. DAVID STEVENS (FHA Commissioner): An institution that has that high a compare ratio is something that would be very concerning to me, and will be one that we're looking at more closely going forward. And if they don't perform at the levels that we would expect and that the taxpayers would expect, we need to make sure that they either improve or they get out of the program.

KEITH: Topdot officials declined to be interviewed for this story, but in an email, a company lawyer said Topdot is working to improve its loan performance by - among other things - adopting more stringent credit requirements. But Topdot isn't alone. There are more than 900 small, FHA-approved lenders that experts say have unacceptable default rates. Guy Cecala is the publisher of Inside Mortgage Finance.

Mr. GUY CECALA (Publisher, Inside Mortgage Finance): The FHA business has been like a magnet for smaller lenders looking to carve out niches in loans that have lower down payments and slightly lower underwriting requirements.

KEITH: FHA requires only 3 and a half percent down, and credit score requirements are flexible. Some lenders are taking full advantage of that flexibility, and some are probably breaking the law. It reminds Cecala of the subprime mortgage market of the past.

Mr. CECALA: You know, in the current mortgage market environment, where we kind of have plain-vanilla mortgages, there's not a lot of opportunity for the small, entrepreneurial - is the best way we can describe it - company who wants to make a niche for themselves in the mortgage market. FHA is one of the only avenues still left.

KEITH: A mortgage company can follow all of FHA's guidelines to the letter and still issue some really bad loans, loans that are destined to fail. But now, FHA officials are making it clear they aren't OK with that, says Brian Chappelle with Potomac Partners, a mortgage industry consulting firm.

Mr. BRIAN CHAPPELLE (Potomac Partners): The message that's being sent is that there is a new sheriff in town at FHA, and that they are going to pursue investigations to see just what the causes are for these high default rates. Where in the past, I don't think a lot of people felt that they really had anything to worry about if they had a high default rate.

KEITH: FHA recently helped shut down one major lender and now, it's going after another: Ideal Mortgage Bankers, also known as Lend America. The company is fighting the government's efforts to kick it out of the FHA program and said, in a statement, it plans to continue to provide affordable financing for those borrowers in need. And the reality is, these companies with unacceptably high default rates are on the margins. Guy Cecala says most of FHA's defaults are being driven by the recession.

Mr. CECALA: They've made loans during a period when housing prices have been declining, so a lot of the loans are underwater. It's not like anybody's really immune from this, so it would be expected that FHA would take some serious losses in this kind of economy and environment.

KEITH: FHA officials say they're open to tightening the loan program's rules, but they say there's a careful balance to strike. If the rules are too tough, some buyers would be pushed out of the market - buyers that are needed to help the housing market recover.

Tamara Keith, NPR News, Washington. Transcript provided by NPR, Copyright National Public Radio.

Source: NPR

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