FHA Lenders: here we go again?
I was sitting at the front reception desk last week where I sit down to write these blogs and a man came in wearing a slick suit and had a stack of business cards with him. Now if this had been 2006, I would have immediately assumed that this was a new sales rep. from one of the sub-prime lenders coming to introduce himself, pass out cards, and talk about all the incredible loan programs he’s offering. You know, the no money down, 1% interest rate for 5 years, no proof of employment, no proof of income as long as you had a 650 credit-score, you’re going to go into foreclosure in two years type of lender. But alas, this couldn’t be the same type of sales rep. It’s 2008. The sub prime lenders no longer exist. No, this man represented a different type of lender: The FHA approved lender.
At the time I didn’t think much of it, but a couple days ago I saw an article in Business Week titled: “FHA-Backed Loans: The New Subprime” written by Chad Terhune and Robert Berner and in it they bring to light the fact that some of the same people who manipulated and weaseled their way into wealth via the subprime market and helped cause this global financial mess, are now getting approved to sell FHA loans. Now this guy probably worked for a totally legitimate company, but it got me thinking. And it should get you thinking too.
So what exactly is an FHA loan? Essentially, they are loans created by the Federal Housing Administration for lower income Americans who otherwise wouldn’t be able to afford a home. They offer small down payments, sometimes as little as 3%, and affordable rates. They can do this because the loans offered are federally insured by HUD (Housing and Urban Development), which gets a pool of funds from us tax payers. In other words, any institution that buys up the loan-backed security is more inclined to do so because if the borrower does default, the government will insure against any loss incurred.
All that being said, FHA loans are in high demand now and FHA can only do so much on its own. And with Bush and Paulson pushing for more FHA loans, more and more lenders and brokers are getting approved to sell FHA loans. And as Terhune and Berner point out in their article, it seems FHA has shown a few lapses in judgment with regards to whom they are giving the ability to sell FHA loans. They site quite a few examples of shady subprime lenders closing their doors and then reopening with a new name, and a new-found focus on FHA loans. “Jerry Cugno started Premier Mortgage Funding in Clearwater, on the Gulf Coast of Florida, in 2002. Over the next four years, it became one of the country’s largest subprime lenders, with 750 branches and 5,000 brokers across the U.S.” They go on to say, “…along the way, premier accumulated a dismal regulatory record. Five states-Florida, Georgia, North Carolina, Ohio, and Wisconsin-revoked its license for various abuses; four others disciplined the company for using unlicensed brokers or similar violations. The crash of the subprime market and a barrage of lawsuits prompted Premier to file for U.S. bankruptcy court protection in Tampa in July 2007. Then, in March, a Premier unit in Cleveland and its manager pleaded guilty to felony charges related to fraudulent mortgage schemes.” It’s clear that Premier was a shady company, I get that. But what I don’t get is how Cugno and family were able to create a new company only weeks after filing for bankruptcy, and were granted a license by the FHA to issue government backed mortgages. The office for the new company, called Paramount, is one floor below Premier’s! It’s clear that the FHA did not put much time into investigating who they were approving to sell their loans. Is it too much to think that the government would be looking out for companies like Premier looking to get involved in the FHA loan business?
So now we know. There are some companies out there that have the potential to repeat some of the unethical business they were doing during the subprime era. Be alert and be informed as always. But also know that it is MUCH more difficult for any company to get away with fraudulent loans. For one, all FHA loans are underwritten by either an FHA approved underwriter, or an actual FHA employee depending on what type of approval the lender has. In addition, all FHA approved lenders are audited once a year. So if you’re looking to get an FHA loan, definitely be aware, but don’t be paranoid.
There is a bigger concern. According to Inside Mortgage Finance, a research firm in Maryland, who “estimates that over the next five years fresh loans backed by FHA that go sour will cost taxpayers $100 billion or more. That’s on top of the $700 billion financial-system rescue Congress has already approved.” (Terhune, Berner). They go on to say, “Gary E. Lacefield, a former federal mortgage investigator who now runs Risk Mitigation Group, a consultancy in Arlington, Tex., predicts: “Within the next 12 to 18 months, there is going to be FHA-insurance Armageddon.”
I know history has a tendency to repeat itself, but can’t another mortgage disaster have waited a good 30 years or so. At least then we could claim that people just forgot, and got greedy again. Armageddon Gary? That’s strong terminology, but who am I to disagree. Maybe someday, when our new President takes office, a good hard look will be taken at FHA, and it will be apparent that they are severely understaffed for the amount of FHA loans being rolled out. And in their desperation to keep up with the influx of loans, they are allowing some lenders who shouldn’t be lending, the ability to provide these loans. And then maybe, we can start learning from past mistakes, and head into the future with a fresh start. Maybe.
Andrew Brentan
December 13th, 2008 at 8:18 pm
That is a very interesting post. It is incredible to know that such sub-prime company got their way to open a new company and even worst the government is sponsoring them to sell FHA loans. Even worse if we go into an FHA crisis it is the government that is on crisis not the private banking industry. Great post!
December 17th, 2008 at 3:31 am
Here we go again … “FHA-Backed Loans: The New Subprime” Don’t people learn?
December 22nd, 2008 at 11:30 am
Yeah i think everyone is pushing FHA loans now a days. Your right it isd the new sub prime.
January 19th, 2009 at 2:34 pm
This is so true, everyone is screaming about less regulation, but at the same time we want borrowers to have at least some form of protection. Yet, the FED is making these same lenders who have complaints or even lawsuits pending get approved for FHA/VA lending.
This is another reason why we, the REALTORS, need to be educated and not just “door openers” and actually look out for the best interest of our clients. Too many agents turn a blind-eye when they suspect something doesn’t smell right. I know a lot of the riff-raff is being cleared out from the industry, but in markets such as mine where it has not been quite as bad, unfortunately there are still just a lot of “door-openers.”
April 9th, 2009 at 10:22 pm
very interesting topic. This is true. A lender is any institution or individual who loans a borrower money.t is incredible to know that such sub-prime company got their way to open a new company and even worst the government is sponsoring them to sell FHA loans.