Repo Homes for Sale, Fraud Burden FHA Funding

For the first quarter of this year, the Federal Housing Administration (FHA) guaranteed about $71.7 billion single-family mortgage loans, representing a 245 percent increase from the previous year. The increase came as the number of repo homes for sale also rose across the country.

U.S. Department of Housing and Urban Development inspector general Kenneth Donohue said that the increase in demand for loans guaranteed by the FHA will most likely take its toll on the agency’s oversight resources and make its programs vulnerable and susceptible to fraudulent schemes.

Donohue pointed out that the surge in demand for FHA-backed loans came at a time that repo homes for sale rose to a record high which, for the first time since 1934, threatens to level out the insurance fund of FHA below the statutory minimum.

The self-sustaining insurance program of the FHA has always been relying on premium payments made on its fund to cover whatever loss that may be incurred due to fluctuating delinquencies and foreclosures homes.

If the FHA fund falls below the required level, it would need a rise in premiums or tax injection to bridge the shortfall, Donohue said.

Congress mandated that FHA’s insurance fund should maintain a ratio equivalent to 2 percent of its insured loans. The September 2007 ratio of 6.4 percent dropped to 3 percent in 2008.

According to Donohue, FHA-supported mortgage was one of the five purchase loans reported in the last quarter of 2008, representing a 6 percent rise from the previous year.
The market share of FHA rose by 63 percent when refinancing was added on its program.

Meanwhile, an estimated 7 percent of properties taken out using FHA-guaranteed loans are in danger of becoming repo homes for sale. Donohue explained that while the deepening economic crisis and precipitous decline in home prices have pushed default rates to a record high, his office is also concerned about the ability of FHA to monitor lending institutions, identify and stop frauds.

The total number of lenders approved by the FHA rose by almost 525 percent since September 2006. Donohue said that the reliability and integrity of several FHA-approved lenders are unproven and may pose a threat to the government’s program to contain the number of foreclosure homes for sale in the country.

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