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Dealing With Signs of Fraud in FHA Loans

How dead would the housing market be if buyers could not turn to the Federal Housing Administration's mortgage insurance program? Low-down-payment mortgages insured by FHA account for nearly a third of all mortgage loans being made now. But there are worrisome signs that the program is being seriously abused, according to a report in Sunday's Post by Dina ElBoghdady and Dan Keating.

Most alarming was their finding that in the past year, the number of borrowers who failed to make a single payment before defaulting on the loans has nearly tripled. The story quoted Kenneth Donohue, the inspector general for the Department of Housing and Urban Development, which includes FHA, as saying an immediate default "clearly suggests impropriety and fraudulent activity."

In response to the story, FHA spokesman Brian Sullivan said that while the agency is managing the extra risks inherent in lending to borrowers with low down payments, they have been asking Congress to boost funding to look for fraud and non-compliance with its lending rules. "We need more money for systems and people," he said. "You need eyeballs, and you need technology."

He pointed to a frustrating glitch in the way some anti-fraud money was already given to FHA. Last summer when Congress approved funding for the ill-fated Hope for Homeowners refinance program, which almost no one has used successfully, it allowed FHA to buy state-of-the-art fraud-detection computer software. But, because of the way the law was written, that software cannot be used for other FHA activities. "By law we can only use it for a program that is not being used," Sullivan said.

Here's one way to get more eyeballs trained on instances of fraud and abuse: If you suspect a problem, contact the OIG Hotline, run by the HUD's Office of the Inspector General. You can call them at 800-347-3735, or e-mail to hotline@hudoig.gov. On the Inspector General's Web site you can download a form for sending in anonymous tips.

By Elizabeth Razzi  |  March 10, 2009; 6:00 AM ET
Categories:  Mortgages , The economy  
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Comments

Elizabeth,

That article was great thanks for posting about it. However, it didn't break the defaults down by whether they had recieved down-payment-assistance (DAP) or the streamlined processing versus more garden-variety FHA loans. Do you have access to anymore details on that? Given that DAPs from builders are being eliminated and cracked down on, this may not be as bad going forward as was presented in the article.

Posted by: kingstowne_renter | March 10, 2009 8:49 AM | Report abuse

Thanks for your comment about down payment assistance. It seems those are not at the root of the problem with instant defaults. The biggest problems arise from refinance deals, which represent two-fifths of all quick defaults. Of those, about two-thirds were conventional to FHA. But some of the firms with the highest instant default rates specialized in streamlined refinancing.

Posted by: elboghdadyd | March 10, 2009 10:32 AM | Report abuse

Thanks for getting back to me on this question!

So, for the other 3/5's I'm guessing that those are not refinances, and it's just the case that the instant default rate in the purchase cases is growing less quickly?

Posted by: kingstowne_renter | March 10, 2009 1:12 PM | Report abuse

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