Over 9200 FHA Loans in Default After No or Only One Payment

There is something severely wrong with this picture, and I cannot wrap my mind around a solution. I am not usually one to spread panic... it's not in my nature. However, it may take me few days to work through a way to solve (or at least give my two cents) this latest report.

Sunday, the Washington Post's story, "The Next Hit: Quick Defaults: More FHA-Backed Mortgages Go Bad Without a Single Payment" told a grim story about the failure of the Federal Housing Authority's mortgage system.

"... the subprime mortgage market has crashed and borrowers are flocking back to the FHA, which has become the only option for those who lack hefty down payments or stellar credit. The agency's historic role in backing mortgages is more crucial now than at any time since its founding.

With the surge in new loans, however, comes a new threat. Many borrowers are defaulting as quickly as they take out the loans. In the past year alone, the number of borrowers who failed to make more than a single payment before defaulting on FHA-backed mortgages has nearly tripled, far outpacing the agency's overall growth in new loans, according to a Washington Post analysis of federal data.

Many industry experts attribute the jump in these instant defaults to factors that include the weak economy, lax scrutiny of prospective borrowers and most notably, foul play among unscrupulous lenders looking to make a quick buck.

If a loan "is going into default immediately, it clearly suggests impropriety and fraudulent activity," said Kenneth Donohue, the inspector general of the Department of Housing and Urban Development, which includes the FHA.

The spike in quick defaults follows the pattern that preceded the collapse of the subprime market as some of the same flawed lending practices that contributed to the mortgage crisis are now eroding one of the main federal agencies charged with addressing it. During the subprime lending boom, many mortgage brokers and small lenders milked the market for commissions and fees by making as many loans as possible with little regard for whether they could be repaid.

Once again, thousands of borrowers are getting loans they do not stand a chance of repaying. Only now, unlike in the subprime meltdown, Congress would have to bail out the lenders if the FHA cannot make good on guarantees from its existing reserves. And those once-robust reserves are showing signs of stress, raising the possibility that taxpayers may have to pick up the tab for the first time since the agency was established in 1934.

More than 9,200 of the loans insured by the FHA in the past two years have gone into default after no or only one payment, according to the Post analysis. The pace of these instant defaults has tripled in one year. By last fall, more than two dozen FHA home loans on average were defaulting this way every day, seven days a week."

That is one of the scariest things I have read in years.

The article goes on to talk about how there is an instant presumption of fraud of loans immediately go into default, but, due to the rise in FHA mortgages, the agency is unable to pursue predatory lenders with haste, if at all. Meanwhile, these lenders or brokers are targeting homeowners with direct mail and phone solicitation, enticing them to refinance over and over again with advertised low rates. The constant refinancing means that a homeowner can take cash out without having to make a payment on the loan.

"The broker makes money on every transaction," said Carr, a former executive at mortgage financier Freddie Mac. "They're not going to turn away an application if they can get it through. There have been situations where people refinance and refinance to avoid making payments and the broker just keeps getting the fees. What do they care?"

This whole thing makes my head hurt.