Tuesday, January 06, 2009
First come the shady operators, then comes the collapse, then comes the bailout, then come the shady operators. That, too often, is the sad history of financial meltdowns and their cleanups.
The closing days of the Bush administration offer the familiar spectacle of bad actors descending on a government program fat with new money and starved of oversight. The object of plunder this time is a Federal Housing Administration program recently empowered to extend an additional $300 billion in loan guarantees, so reports BusinessWeek.
The plunderers include the seediest of subprime mortgage lenders, back for a second feeding, this time off the taxpayers. The Department of Housing and Urban Development, which manages the FHA, has fined, sued and even removed some of the rogue lenders from the program, but they keep coming back.
"Within the next 12 to 18 months, there is going to be FHA-insurance Armageddon," Gary Lacefield, a former federal mortgage investigator-turned-consultant in Arlington, Texas, told the magazine.
Criminal convictions, bankruptcies, state sanctions and civil lawsuits rarely pose an obstacle to these players. They've changed their spiel, and some have changed their name.
And who's checking? Since 2007, the number of FHA-authorized lenders has more than doubled to 36,000, while the FHA's staff stayed flat at 1,000 people. The unit that monitors the lenders and approves new participants had only five slots, two of them vacant in recent months.
At the height of mortgage mania, the stodgy FHA lost business to subprime hotshots flashing those low come-on rates. After all, the agency required some down payment and proof of an ability to pay the money back. These were boring 30-year fixed-rate loans.
Now FHA mortgages are the main game. The number of new ones has jumped from 60,000 last January to 140,000 in September.
The FHA guidelines endure, but unscrupulous mortgage companies can work around them. They can still use phony data to certify unqualified buyers and inflate the prices of the houses being sold. And they are doing just that. The loss to taxpayers from new FHA loans could exceed $100 billion over the next five years, predicts an industry newsletter, Inside Mortgage Finance.
What kind of companies are being licensed to offer 100-percent-taxpayer-guaranteed mortgages?
There's a company in Coral Gables, Fla., with the wonderful name Great Country Mortgage Bankers. It broke FHA rules by letting borrowers take on mortgage and condo fees totaling more than 31 percent of monthly income. And the default rate on its FHA loans stood at 13 times the local average. Still, Great Country Mortgage was kept on as an authorized FHA agent until last November.
Nationstar Mortgage, based near Dallas, last year paid Kentucky a $105,000 settlement over allegations that it used unlicensed loan officers and faked borrowers' credit scores. That didn't stop it from getting a green light in March to give out FHA loans. A Nationstar executive subsequently called FHA loans his company's "high-growth channel."
First Magnus Financial, in Tucson, Ariz., earned a multitude of state and federal citations for sleazy and unlawful lending practices. It reopened under a new name, StoneWater Mortgage -- same executives in the same building -- and received a license to dole out FHA loans.
An agency spokesman noted that FHA-licensed lenders must disclose past regulatory sanctions and may not employ anyone with a criminal record. Good idea, that honor system. As we know, crooks never lie.
Will the new guard in Washington take more than a passing interest in what happens to the hundreds of billions flying out the door? The House Financial Services Committee plans to hold a hearing Friday on "FHA Oversight of Loan Originators." Sounds like a promising start.
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