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Ginnie Mae's growth gives fuel to risky lenders

Sixteen mortgage lenders endorsed by Ginnie Mae have been cited by various federal regulators for unsafe banking practices, insufficient capital or other violations. Thirteen firms have been fined, sanctioned or ordered by HUD auditors to cover the cost of bad loans. Eight firms have FHA loan portfolios that are defaulting at double the rate of their principal competitors, which can be grounds for suspension from the FHA program. Another eight companies have FHA default rates more than 50 percent higher than the average in their area.

Premium Capital Funding of Jericho, N.Y., for example, is the subject of several lawsuits in federal court alleging that it misled borrowers about the terms of both traditional and FHA loans. Its default rate on FHA loans made in the past two years is 14.3 percent, or more than double that of other lenders in its area. The company's default rate has more than tripled in the past year, yet Premium was allowed to sell $78 million of Ginnie Mae securities from January to September, according to Inside Mortgage Finance.

Andrew Pennacchia, vice president of legal affairs at Premium, said Ginnie Mae has not raised concerns about the company's FHA default rate. Pennacchia said that Premium believes the suits filed against it lack merit. He also noted that some of the claims have been dismissed.

MVB Mortgage of Southfield, Mich., was faulted by the Federal Deposit Insurance Corp. in a 2007 order for allegedly helping a bank founded by one of its owners violate federal banking laws. Moreover, MVB has an FHA default rate on loans made in the past two years of 11 percent, nearly twice the average in its area. Still, MVB was allowed to sell $110 million in Ginnie Mae securities from January to September, according to Inside Mortgage Finance.

MVB president MaryAnn Tomczyk said Ginnie Mae officials have not been concerned about the FDIC cease-and-desist order, which is the subject of an ongoing FDIC investigation and a federal lawsuit. But Tomczyk said Ginnie Mae last year required the company to lower its FHA default rate to 7.5 percent and capped the volume of securities MVB can issue at $5.5 million per month.

According to court documents, MVB disagreed with the FDIC's finding and has sued the agency to reclaim seized funds.

The most expensive blow to Ginnie Mae came this summer with the bankruptcy of the giant Florida mortgage lender Taylor, Bean and Whitaker. The firm not only made mortgage loans but bought loans from hundreds of other lenders that didn't have Ginnie Mae status and converted the loans into securities.

More than a dozen of such lenders had previously been sanctioned -- for instance, fined or put on probation -- for violating FHA rules. In July, Ginnie Mae discovered inconsistencies in filings Taylor, Bean and Whitaker made with the agency, prompting an investigation. A month later, HUD accused the company of providing false information to the department and failing to file required reports and notify officials about transactions that could put the FHA at risk of fraud.

An attorney for the lender could not be reached for comment, despite several attempts.

Ginnie Mae declined to say how much the lender's failure will cost the agency.

Ginnie Mae officials said they have required many issuers to take corrective actions, which often aren't publicly disclosed. The officials said they closely evaluate the lenders, looking at metrics such as payment defaults, staffing levels and other measures of financial health. "We consider all sources of information and take the appropriate actions, working closely with the office of the general counsel within HUD," said Stephen L. Ledbetter, vice president for mortgage-backed securities at Ginnie Mae.

But in November, Ginnie Mae's outside auditor reported a "significant deficiency" in Ginnie's internal controls: The agency could not adequately track whether loans sold to investors had been insured by the FHA and therefore met government requirements. The auditors noted they first identified the problem in 2007.

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