Mortgage companies that do not comply with government regulations for originating and servicing Federal Housing Administration-insured mortgages should be "hit in the one place they really care (about) - their pocketbooks," a Ralph Nader group suggests.
In a new study of FHA lender conduct, entitled "More Holes Than Net," Nader's Center for the Study of Responsive Law urges the Department of Housing and Urban Development to deny insurance payments to lenders who have made imprudent loans, serviced them poorly or failed to protect houses when FHA-insured mortgages have goned into default.
A "strong incentive exists for imprudent (FHA) lending because loan originators earn a substantial portion of their income up front when a loan is made," the report noted. "FHA-insured loans provided little incentive for loan servicing that adequately protects HUD from needless foreclosures."
HUD insures FHA single-family loans on the basis of information supplied by the lender, the center noted. Lenders at present must merely certify, to their "best knowledge and belief," that applicants' mortgage forms are accurate and complete.This has led some mortgage companies to mis-state borrower's income in order to close an insured loan and collect interest, the center said.
HUD should replace the current "weak assurance" system with a "a warranty by the lender that it has made all reasonable efforts to ensure the information it supplies is reasonably correct," the group said.
The center said the level of lender misconduct has declined in recent years - as applications for FHA mortgages have dropped off.But it warned that the administration's renewed emphasis on housing production "promises to boost once again both FHA loan volume and the number of abuses."
The report concludes that HUD's reviewing system for lender abuse is underfinanced and understaffed. It suggested a new, self-funded office for mortgagee monitoring. Lenders would finance it, as federal banks now pay for their own regulation by the Comptroller of the Currency and the Federal Deposit Insurance Corporation. The estimated annual cost of $3.3 million would be returned if the foreclosure rate dropped as little as 12 per cent, or 371 foreclosures.