The Department of Housing and Urban Development said yesterday it will tighten procedures in an effort to stem "widespread" fraud and abuse in its home-loan insurance program, focusing particularly on people who get Federal Housing Administration mortgages on rental property.
HUD Secretary Samuel R. Pierce Jr., citing abuses that have cost the federal government "hundreds of thousands of dollars," said he has endorsed a list of changes proposed by a HUD task force that has spent the last year studying 1.7 million loans insured by FHA since 1980.
"These actions will make it more difficult for the dishonest to engage in fraud, will make it easier to detect fraud, and will make punishment a certainty for those who are caught using FHA to steal from the taxpayer through fraud or other illegal means," Pierce said. "We want the program to serve the people it was created to help . . . especially those who need FHA to become home buyers for the first time."
While FHA fraud schemes have been uncovered in several cities around the country, Judith L. Tardy, HUD's assistant secretary for administration and chairman of the task force, said the group has now found evidence of widespread investor-related problems in loan documents in six of HUD's 10 regions, and that the problems with investor-owned property are neither "isolated nor is the magnitude diminishing."
FHA is a program that was established in 1934 to provide mortgage insurance for low- and middle-income home buyers. Under FHA, if a home buyer defaults on his loan, his lender can recover any losses associated with the foreclosure from FHA. Pierce said that FHA today loses an average of $17,000 on each loan that goes into default. There are currently 4.4 million single-family loans with an estimated value of $129 billion insured by FHA.
Pierce said the agency is not being pushed into the red by these schemes. He added that it does not know how many of its claims stem from fraudulent practices. The task force found that although only 12 percent of FHA loans are for investor-owned property, 30 percent of the properties going into foreclosure are in that category.
HUD moved several months ago to bar several Washington area real estate firms, mortgage companies and appraisers from doing business with FHA after an investigation indicated that the firms had falsified documents in obtaining FHA loans.
The HUD inspector general is currently investigating 44 cases involving 500 loans in 30 cities across the country. While many of the schemes are similar, the task force did not find links between abuses in different areas.
Of the schemes uncovered, Tardy said the most common involved investors who refinanced their property with a FHA-insured loan, took out cash as part of the refinancing and subsequently defaulted on the new mortgage, leaving FHA liable to pay off their loans.
In other deals, investors refinanced and sold their properties, allowing their loans to be assumed by unqualified buyers. When the buyers defaulted, FHA was left to pay off the claim. In other cases, Tardy said, investors continued to collect rents without making mortgage payments as the loan went into default and foreclosure. In some cases, sellers would draw up loan documents for buyers who did not exist, or falsify employment and asset information for existing buyers so that they would qualify.
Under the new safequards, HUD would deny new FHA-insured loans to borrowers in cases where a claim had been filed against the borrower in the past three years. HUD would also require credit checks on people assuming FHA loans that are less than two years old. HUD would also report people who default on FHA-insured loans to credit bureaus and try to recover other assets from defaulting borrowers.
Tardy said that in Fresno, Calif., the task force found that several investors had defaulted on four or more FHA loans while they had assets that could have made the payments. In one case, an investor got seven FHA loans and defaulted on four, although he had assets worth more than $8 million.
The National Association of Home Builders and the Mortgage Bankers Association of America applauded HUD's actions, but said there were several recommendations that they felt went too far.
As part of the crackdown, HUD said it would adopt a new policy requiring appraisals of FHA-insured houses to reflect the true cash value of the property. As part of that, the department said it would set a limit on the extent to which the seller could subsidize the buyer's financing in an FHA purchase. If the seller makes contributions, such as paying discount points or "buying down" loan interest rates, totaling more than 5 percent of the loan, FHA would subtract the excess from the appraised value of the house.
Stephen Melman, federal projects director for the home builders, said the 5 percent limit was too rigid and would "disrupt the marketplace."