Even as government agencies settle mortgage and foreclosure related lawsuits, the Dodd-Frank legislation takes effect and the nation grapples with the fallout from the largest credit crisis in U.S. history, the truth is we're no better off today than we were when this entire mess began to unravel back in 2007.
Even after the collapse of Fannie and Freddie, the insolvency of FHA, and a litany of bailout programs, including, but not limited to TARP, HAMP, QE1, QE2, HARP, TALF, and a host of others, too numerous and boring to list here, it seems that the only lending going on today in the real estate industry is insured by the taxpayers. Most folks may think that "government insured" means that some mysterious entity in Washington is simply printing money to cover any and all government insured losses. And yes, I know that the FED comes to mind...but it's not supposed to be that way.
The truth is, the mortgage loan shenanigans continue. Even after the uproar over subprime lending, which led the first wave of mortgage defaults and bank failures, that became the housing meltdown, the sub-prime market continues. It's growing even faster than it did the first time. And it's no wonder, since the new lending guidelines for a "government insured" USDA Rural Development mortgage loan have NO minimum credit score, assuming other qualifying criteria are met. And a borrower can borrow 100% of the value of the home. It's no wonder this program is growing at an exponential rate. But this time, instead of private capital being at risk, it's the taxpayers who will be responsible for these "government insured" mortgages.
In fact, according to an article written by George Brooks, published this week on insidemortgagefinance.com, the USDA is refusing to make public its default rates. The most recent data, published in July of 2011, indicated that the default rate was about 18%. That's "official" numbers. It's likely that this program, currently sitting on 80 BILLION dollars worth of taxpayer backed mortgage loans, actually has an expected default rate higher than FHA. When you consider that FHA and USDA are allowed to use accounting methods that would be illegal for private companies, it's all the more disturbing.
The article also notes important data from Edward Pinto, Resident Fellow at The American Enterprise Institute saying:
"Among the USDA, FHA and Department of Veterans Affairs single-family mortgage programs, the USDA has shown the most explosive growth with a nearly tenfold increase in its share of the home purchase from 2005 to 2010, compared to a sevenfold increase for the FHA and threefold increase for the VA..."
That would be bad enough, but a study published in 2011 by the Office Of the Inspector General for HUD, dubbed "Operation Watchdog" determined that there are systemic problems with improper underwriting among lenders who originate FHA insured mortgage loans. A random study of a sample of mortgage loans originated by companies with high default rates found that 49% of the sample contained loan applications for borrowers who did not qualify for a wide variety of reasons such as lack of income, low credit scores, debts that were too high, or even no income and no credit at all. Many of the loans in this sample defaulted less than 12 months after origination. But the lenders had in fact certfied them as properly underwritten, and meeting FHA guidelines for loan insurance. The small funding fees charged to borrowers can't possibly cover the costs of such high default rates.
In a nutshell, the lenders were originating loans that they knew were worthless, and falsifying their certification in order to sell them as FHA insured. These loans resulted in 23 million dollars worth of claims for 140 loan defaults, from the lenders included in this review.
The OIG also pointed out that FHA must pay these claims by law, before even investigating whether the loans were eligible for insurance payment. Only after the fact can FHA or HUD go back and check to see if a loan they paid a claim on, actually was legal and met the guidelines. If it was not, the agency must then spend more time and money to attempt to recover those insurance funds from the lender. Apparently the lenders themselves lobbied for this law, as it simply makes no sense.
Further, the Office Of the Inspector General for HUD pointed out that most claims are paid and NEVER reviewed to insure that the claim was legitimate. While HUD has attempted to put procedures in place, OIG found that there was no effective review process for these loan claims. So the taxpayers pony up millions in loan guarantees for bogus loans that never should have qualified for loan insurance in the first place.
While most of the recommended solutions are related to changes in existing procedures, or the implementation of new procedures for reviewing loans to insure that they are properly underwritten, it seems that no agency feels it necessary to act on anyone's recommendations about making changes to existing plans. Indeed HUD responded to it's own Inspector General by saying that it's current plans were fine and that HUD felt there was no need to implement any recommendations from OIG.
The U.S. housing market was once considered to be one of the safest of investments for private capital. But government insured lending programs are turning it into a casino for unscrupulous lenders and borrowers. This has put the U.S. taxpayer on the hook for hundreds of billions of dollars in loan guarantees, while forcing concerned investors elsewhere in an attempt to protect their capital.
Donna S. Robinson is a 16 year veteran of the real estate industry, and a staff writer for Realty Biz News. She is a coach and consultant to real estate investors. Join her email list on her website at www.RealtyBizConsulting.com to receive information on coaching, training and consulting programs for real estate investors. Her book "Fundamentals and Strategies For Buying And Selling Homes" is an easy-to-understand guide for beginning investors, home sellers and home buyers who want to avoid expensive government loans.