Executives with criminal records slip through FHA crackdown, documents show
Sunday, September 12, 2010
A crackdown on reckless mortgage lenders by the Federal Housing Administration has failed to root out several executives with criminal records whose firms continue to do business with the agency in violation of federal law, according to government documents, court records and interviews.
The get-tough campaign has also been hamstrung because, even when the FHA can ban mortgage companies for wrongdoing or an excessive default rate, the agency does not have the legal power to stop their executives from landing jobs at other lenders, or open new firms.
After the collapse of the home loan market, the FHA launched an effort aimed at reducing losses on mortgages it insures by weeding reckless lenders out of the program.
But documents and interviews reveal that more than 34,000 home loans have been issued over the past two years by a dozen FHA-approved lenders that have employed people who were convicted of felonies, banned from the securities industry or previously worked for firms barred by the agency.
More than 3,000 of those loans, about 9 percent, were seriously delinquent or already a claim on the FHA insurance fund as of June 30. That's nearly triple the rate for all loans made by FHA lenders over the past two years, about 3.4 million.
Compared with other regulators, critics of the FHA say it rarely cracks down on company executives. "In the securities industry, you bar people for life. You don't see that a lot with the FHA," says Mark Calabria, director for financial regulation studies at the Cato Institute.
Policing the cubicles and corner suites of FHA lenders is crucial because the agency, which encourages home ownership by insuring mortgages made by qualified lenders, has become a cornerstone of the U.S. housing market. Its portfolio of guaranteed loans has grown to $800 billion in March from $466 billion in fiscal 2008. The agency's insurance program is financed by premiums paid by FHA borrowers, but taxpayers would be on the line if those funds are depleted.
The agency has long struggled to stop companies from slipping risky loans under its protective umbrella. It has done this in part by barring lenders if too many of their borrowers default.
FHA Commissioner David H. Stevens has vigorously defended the agency's bid to drop lenders with higher than average default rates or evidence of fraudulent loans. "No one can feign that we're not all over fraud now, in this administration," Stevens says. Since January, the agency has fined or withdrawn the approval of more than 1,100 lenders to issue federally insured mortgages, according to records provided by the FHA.
But he added, "By no means do I think are we are out of the woods, yet. . . . There are going to be some of these guys who slip through."
The internal watchdog at the Department of Housing and Urban Development, which oversees the FHA, says the agency has failed to systematically monitor the people making home loans. In recent congressional testimony, he called for "a new mind-set at the FHA to know your participants and not just the entity."
Legislation passed by Congress last year bars any individual from working for an FHA lender in a range of positions if convicted of a felony that "involved an act of fraud, dishonesty, or a breach of trust, or money laundering." The law, which broadly addressed foreclosure prevention efforts and housing policies, also rendered an FHA lender ineligible if it employs a person convicted of an offense "that reflects adversely" upon the company.