FHA Defaults Exploding

This is the problem. Nobody needs to use physical force or the threat of it( which is the only power government has) to get people to do things they see as in their own interest. In all markets in which coercion is banned, buyers and sellers meet in the middle at a price in which the seller gets the best available price from buyers who see the house as a good value. All parties, from the buyer to the lender who is taking on the loan risk have the incentive to look after themselves.

Of course the judgements of the marketplace often tell us things we don't like to hear. They might say that we can only afford a two bedroom home when we want one with four, or tell us we need to save a larger downpayment or even that we might be better off renting for now.

The current crisis developed after generations of government policies worked to convince more and more people that they had to buy homes they couldn't really afford. The primary mechanism at work was one of shifting risks further and further away from the primary parties involved, usually through the government "guarantee".

No need to wonder if your bank is making sound investments with your savings--- there's an FDIC guarantee.

No need to ask about larger amounts in huge institutions--- they are probably, too big to fail

No need for the bank to examine the buyers credit--- Fannie Mae will be buying and guaranteeing the loan or Freddie or the FHA etc...

The end result is a housing market filled with a huge number of people who bought homes they couldn't afford. The solution should be equally simple; just let homes fall to a price at which buyers can afford conservative downpayments of 10-20% and payments are no more than 20-25% of income.

Of course, this solution involves telling millions of people they likely overpaid for their homes-- something they don't want to hear.

So now, the house is on fire and the goverment cleanup crew is dousing it with a heavy dose of sober accounting and lending standards-- right? Well, actually they are thinking about telling banks to lie about the value of loans on their books.

They are being honest about which banks are in trouble so depositors don't give them more money to blow? Well, actually the fed and FDIC have refused to say which institutions are in trouble or which toxic assets the government has bought or guaranteed. They have done nothing to prevent troubled institutions from luring deposits with high interest rates.

But, they have worked to oust bad managements and punish frauds? Well, at this poiint almost all major firms are under the same management.

They are at least trying to toughen loan standards right? NO!, NO!, NO! The government is in fact working like crazy to reinflate the bubble by cutting loan standards again. The main mechanism for this shift is the massive growth in FHA loans which now comprise at least a third of the market.

We know for example that buyers who put down little or nothing for the downpayment were at high risk of default. So, why is the FHA making more loans of this type?

Another major red flag is the huge percentage of downpayments made by non-profit entities which are often funneling money from the seller for a fee.

"In 2005, HUD commissioned a study entitled “An Examination of Downpayment Gift Programs Administered By Non-Profit Organizations”. Later that year, another report titled “Mortgage Financing: Additional Action Needed to Manage Risks of FHA-Insured Loans with Down Payment Assistance” was completed by the U.S. Government Accountability Office. Both studies concluded that seller-funded down payment assistance increased the cost of homeownership and real estate prices in addition to maintaining a substantially higher delinquency and default rate."

The results of these policies are now bearing fruit-- defaults are exploding and so is likely fraud

"In the past year alone, the number of borrowers who failed to make more than a single payment before defaulting on FHA-backed mortgages has nearly tripled, far outpacing the agency’s overall growth in new loans, according to a Washington Post analysis of federal data.
Many industry experts attribute the jump in these instant defaults to factors that include the weak economy, lax scrutiny of prospective borrowers and most notably, foul play among unscrupulous lenders looking to make a quick buck.

If a loan “is going into default immediately, it clearly suggests impropriety and fraudulent activity,” said Kenneth Donohue, the inspector general of the Department of Housing and Urban Development, which includes the FHA."

The default rates are shocking.

"Add the percentage of FHA loans in the foreclosure process to the total loans that are delinquent at least one month and we have a total default/delinquency rate of 15.24%. Something is clearly wrong with the FHA loan program and another major bailout of a federal lending agency seems inevitable.

How Crooks Played HUD In Albany And Other Cities

After watching that Soprano's episode, I looked around for info about HUD loan frauds in urban areas. This article that focuses on fraudulent operators in Albany, touches on the main ingredients of some typical scams. I'm hardly, an expert on this, but it seems that the key factor at work is the HUD loan guarantees themselves, which create situations in which few people have an interest in policing loan quality. They have little or none of their money at risk. In come the crooks who know a honey pot when they see it.

"AMI, which was purchased by Wachovia Bank in late 2003, specializes in originating and servicing multi-family mortgage financing. Through Fannie Mae (a government sponsored enterprise active on the secondary mortgage market) and its Delegated Underwriting and Servicing program, as well as through the insured lending program of the Federal Housing Administration (FHA). The FHA is a sub agency of HUD. The AMI loans given Aaron Dare and Emerge were FHA insured. As in, covered by taxpayers."

"The mortgage frauds to which Dare confessed utilized straw buyers, recruited by Dare's unidentified conspirator. Supposedly, some were street criminals. Straw buyers are low on the ladder of mortgage fraud. A white collar crime which according to the FBI, has become epidemic. Mortgage fraud is typically committed by rings of real estate professionals. At times involving collusion as high up as the lending level. Even when collusion isn't a factor, the immense profits which flow from the sale of mortgage loans (including high interest and fee rich subprime loans) on the secondary investment market have made some lenders sloppy about underwriting practices."

A common form of mortgage fraud is "flipping". Not all flipping is illegal. In the fraudulent variety, straw buyers are supplied with fake proof of employment and finances by collusive realtors, mortgage brokers, sellers, etc. The straw folk take out mortgage loans they have no intention of repaying. The properties they "buy" have often been acquired cheap by the sellers, who inflate the value of the properties via cooked appraisals. Sometimes by as much as 500%. Hence the loans straw buyers receive are for much more than the properties are worth. Everyone in the ring takes their cut and walks away. The loan goes into default. While momentarily goosing property values (and eventually, local property taxes) mortgage fraud and its aftermath ends up speeding neighborhood decline and depressing values. In troubled or borderline neighborhoods, where mortgage fraud is most prevalent, taxpayers frequently pick up the tag.

In the mortgage frauds perped by Aaron Dare and his unnamed conspirator, the lenders were BNC Mortgage and Fremont Investment and Loan. Both based in California, both highly active national subprime lenders. BNC is a subsidiary of Lehman Brothers Bancorp. Both BNC and Fremont have had other bad experiences in New York State. In 2005, both were defrauded in a Nassau County case involving properties in that county and in Brooklyn. And Fremont, along with several other mortgage lenders, was recently utilized by a ring made up of overlapping groups of real estate professionals from upstate and downstate New York and northern New Jersey. This ring (the Sandella Ring) targeted Suffolk County and wide swaths of Brooklyn. Its most notorious member was Emmanuel "Toto" Constant. Formerly of Haiti."

Like in Soprano's episode, often phony or corrupt non profit housing and development agencies provide cover for the crooks.

"As the Urban League was imploding, Aaron Dare was established a string of state registered real estate entities. Many with "emerge" in their titles. There was Emerge Real Properties LLC, Emerge Construction, Emerge Historic Residential Community, I, II, and III. This time Dare's target was Albany's south side. In early 2001, Dare and Emerge bought 39 residential buildings, covering blocks of a downtown nabe called The Pastures, aka Historic Pastures. Dare also bought a brewery that had been converted into residences, plus a similarly converted schoolhouse in nearby Schenectady. All were designated "historic". Hence eligible for state and federal tax credits. Dare bought the properties with close to $8 million in loans from AMI Capital Inc., a Maryland based mortgage lender. AMI in turn, funded the loans via a warehouse lender in Columbus, Ohio"

Drug War Failure Update

Hundreds of billions of tax dollars have lead to this. Phoenix now number two global kidnap capital behind Mexico City.