April 3, 2009 in Nation/World

Rising fraud, defaults put FHA efforts in jeopardy

Agency playing greater role in housing market
Les Blumenthal McClatchy
 
The Spokesman-Review photo

Murray
(Full-size photo)

WASHINGTON – As the Federal Housing Administration has stepped in to help stabilize the housing market by underwriting more mortgages, the Depression-era agency is seeing growing default rates that could undermine its health, the Department of Housing and Urban Development inspector general testified Thursday.

Kenneth Donohue also told the Senate Appropriations housing subcommittee that unscrupulous lenders who helped precipitate the housing crisis with subprime loans are moving into the FHA loan system, and the number of fraud cases is a growing concern.

Sen. Patty Murray, D-Wash., who chairs the subcommittee, said that if the FHA can’t pay its debts, Congress may have to cover the shortfall.

“And we don’t have the dollars to do it,” Murray said.

While some see the FHA as the “savior of the market,” Murray said, she’s concerned the agency suffers from outdated technology, personnel shortages and inadequate underwriting.

“Just because FHA has become a major player in saving the housing market doesn’t mean these challenges have disappeared,” she said.

In addition to the resurgence of FHA-guaranteed mortgage loans and the stimulus bill, lower interest rates and an $8,000 first-time home buyer tax credit are helping to stabilize the market, J. Lennox Scott, the chief executive of John L. Scott Real Estate in Washington state, told the committee.

Two years ago, FHA-backed loans made up only a small percentage of the housing market. The agency didn’t underwrite subprime or adjustable rate loans. As prices rose, the FHA was barred from writing loans on mortgages above $362,500.

The maximum was raised in the stimulus bill to nearly $730,000. As subprime loans and adjustable-rate loans disappeared, the FHA now guarantees nearly 30 percent of mortgages. At the same time, the number of lenders doing business with the FHA has grown more than 500 percent.

“As is the case with other mortgage market participants, currently FHA is experiencing elevated default rates and foreclosures and with it, losses that exceed prior estimates,” HUD Secretary Shaun Donovan said.

Donovan said the primary reasons for the defaults were growing unemployment and other economic factors. Donovan said FHA-guaranteed loans didn’t include “unsafe features” and poor underwriting that made subprime and other loans risky.

About 7 percent of FHA loans are delinquent, greater than 90 days late, or in foreclosure, compared with more than 23 percent of subprime loans, he said.

Pressed about whether the FHA may need a significant bailout, Donohue said, “It’s hard to say. Based on the numbers we have seen, it is going in the wrong direction.”


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