Fraud hits FHA loans

Strong action needed to stop unscrupulous brokers

March 16, 2009|By Robert J. Strupp

After 10 years of near-dormancy, the Federal Housing Administration - unable to compete in an era dominated by the subprime loan market - has lately been making a comeback as an insurer of home loans in Baltimore. Unfortunately, today's FHA-approved mortgage brokers are frequently yesterday's subprime brokers. Fraud has tainted the FHA loan process - and strong steps must be taken in response.

Available financing is essential to ending the housing crisis and enabling qualified buyers to purchase or refinance responsibly. The need is great; foreclosure filings in Baltimore are once again hovering around historic late-1990s numbers, and at various levels of government, industry and advocacy, there is talk about principal write-downs, government refinancing programs and a moratorium on foreclosures (though the latter is regrettably absent from the Obama administration's foreclosure prevention proposals).

The FHA is currently one of few options available to buy or refinance a home for those with sufficient income but lower credit scores and minimal down-payment resources. Last March, one of Baltimore's experts in the housing field, Vincent P. Quayle, on this page expressed hope that "the FHA and the lending community will have learned from the past and will support once again a system based on trust and fairness." This past week, The Washington Post reported a national increase in FHA loan defaults - especially alarming because borrowers are defaulting on their first or second loan payments.

Why is this happening? Kenneth M. Donohue Sr., inspector general of the Department of Housing and Urban Development, stated that when loans go "into default immediately, it clearly suggests impropriety and fraudulent activity." The Post article warns of the FHA's apparent lack of capacity to enforce its applicable laws and regulations. It also points out that "by the end of 2008, 5,200 of [FHA's] defaults were on loans promoted through telemarketing, direct mail and the Internet, practices not approved by the FHA before 2005." The Mortgage Asset Research Institute in Reston, Va., reported that in the second quarter of 2008, instances of fraud among lender industry professionals exceeded 2007's incidence by 45 percent.

A decade ago, a task force was created to investigate predatory and deceptive real estate transactions in Baltimore because of concerns that mortgage fraud was undermining the stability of Baltimore's neighborhoods. Foreclosure filings in Baltimore for 1999 had risen to 5,000; by the next year, the city had the highest number of FHA foreclosures in the United States. As a result, the Department of Housing and Urban Development announced a 90-day moratorium on foreclosures in Baltimore, and in an effort to help homeowners whose mortgages were inflated by fraudulent appraisals, directed mortgage lenders to write down their mortgages to amounts consistent with fair market value. Indeed, HUD proposed that where a lender refused to cooperate, the agency would step in and cancel the existing mortgage and refinance the property at fair market value. These solutions should be considered for today's foreclosure crisis as well.

Federal, state and local agencies are committed to combating mortgage fraud, but commitment isn't enough. We need innovative solutions to regulate all components of the housing transaction process, and to reduce and mitigate the consequences of foreclosure. Regulatory and enforcement agencies must be funded and supported to the fullest extent required to enforce laws that regulate the various components of the housing and lending industries.

Regulatory agencies have recently developed multi-agency task forces to address mortgage scams; this is an important step forward. The Community Law Center and the Baltimore and Prince George's County homeownership preservation coalitions share an enforcement committee to bring the regulators, the regulated and other stakeholders together to collaborate on emerging trends in real estate fraud and deception. It is essential that all of us be willing to work together to address this plague on our communities.

Robert J. Strupp is director of research and policy for the Community Law Center in Baltimore. His e-mail is roberts@communitylaw.org.

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