Do More FHA Loans Equal More Fraud?

by Peter G. Miller
December 17th, 2008

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Is fraud a big FHA problem? Is fraud a bigger problem with FHA loans than with other forms of mortgage financing?

I ask because according to the New York Times, “as credit tightens, F.H.A. is the sudden star of the nation’s housing market. In September alone, it endorsed over 96,000 new home loans, more than triple the number it approved in the same month last year, federal data shows. But some housing industry experts worry that F.H.A. may soon be hit by a wave of mortgage-related fraud and abuse that it is ill prepared to deal with.”

In addition to ending a sentence with a preposition, the logic behind this statement is not well developed.

If one assumes that fraud levels hold steady, then an expansion of the FHA program would mean a parallel and concurrent rise in the number of frauds related to the program, not an increase in the percentage. In other words, merely because the number of FHA loans is growing does not mean that more crooks are attracted to the program.

In fact, it’s much more logical to assume that FHA origination growth would lead to a decline in fraud levels.

Huh? Why is that?

For the past few years private-sector lenders have been churning out loans at remarkable levels — in part by ignoring traditional underwriting standards.

___ You say you want to borrow from us buy have no money for a downpayment? Great.

___ You say you want a mortgage but don’t want to let us check your income or employment? No program, we’ve got a program for you.

___ You say you earn $17,000 a year but want a $500,000 mortgage? Why not! Shouldn’t everyone have a swing at the American dream?

As more and more borrowers turn to the FHA program, fewer and fewer borrowers will qualify for financing on the basis of wacky standards or no standards. The result is a better, more credible pool of mortgages, loans that investors will be able to buy with confidence.

For example, the Mortgage Bankers Association says that foreclosure starts for both prime and FHA loans remained unchanged in the third quarter. Given that fraud and foreclosure are often related, one would expect to see rising FHA foreclosure rates if increased fraud was a real problem.

“The non-seasonally adjusted foreclosure starts rate remained unchanged for prime loans at 0.61 percent and decreased three basis points for subprime loans to 4.23 percent. The rate was unchanged for FHA loans at 0.95 percent and increased two basis points for VA loans to 0.59 percent.”

For the full story see: As F.H.A.’s Role Grows, So Does the Risk of Fraud

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