Probability of Fraud Increases With FHAs Rising Popularity

by Heindrick So
December 12th, 2008

It’s no secret that many homeowners are relying on the FHA to fund their mortgage needs as other lenders continue to tighten up their guidelines. In September for example, the FHA issued three times as many loans as it did in the previous year. 

Unfortunately, homeowners haven’t been the only ones turning towards FHA for “help”. With fewer channels for fraudsters to operate, you can imagine how the FHAs risk of fraud increases as it becomes the major source of mortgage funding.

Mortgage Originators Feeling the Squeeze
In the past few years, FHA stood on the sidelines as many loan originators opted for subprime, conventional, and private investor routes of mortgage funding. As those options eventually disappeared, FHA became the sudden all-star of mortgage lending. But before mortgage companies and lenders are allowed to issue FHA loans, they must meet strict requirements and go through a lengthy process to become FHA-approved lenders. 

As a result, one of the most serious problems concerning FHA fraud is the issue of loans being brokered illegally.  Since FHA loans are limited to FHA-approved lenders, unauthorized individuals have been looking for other ways to get their slice of the pie. Unfortunately, this often means higher closing costs for the borrower as they are essentially paying two brokers–one who’s FHA-approved and another one who isn’t. When shopping for an FHA loan, find out if your broker or lender is FHA approved. If they aren’t, ask how they plan to fund your FHA loan and if it’s going to cost you extra in terms of closing costs

The New York Times also wrote a column concerning FHA fraud and highlighted a story about an FHA mortgage company guilty of repeated offenses. Here’s an excerpt:

“… federal officials began to review one lender, Great Country Mortgage Bankers of Coral Gables, Fla., five months after its default rate exceeded twice the average, according to Mr. Wooley, the HUD spokesman. But it was not until last month that HUD officials ended the firm’s ability to act as an F.H.A. agent. By then, its default rate was more than 13 times the local average, federal data shows. Mr. Wooley said a HUD inspector general’s review of the firm led to the delay. Great Country’s situation is by no means unique. About 80 of the 1,800 mortgage companies authorized to endorse F.H.A. loans, including some no longer in business, have default rates from 2 to 11 times the average of local lenders, federal data shows.”  [ Full Story @ NYT ]

Same Problems Could Lead Us In the Same Direction
These unscrupulous individuals care little about limitations of the law, let alone their client’s best financial interest. Although FHA has been the shining star of lending recently, individuals will always find ways to take advantage; even if that means giving you a loan that you can’t afford. As you can imagine, the same folks could end up causing the same old problems–no matter what type of loan they’re being forced to offer you. 

If you’ve been considering an FHA loan, shop around and compare different lenders. Remember, just because the loan is insured by the government doesn’t mean that it’s immune to mortgage fraud.

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One Response to “Probability of Fraud Increases With FHAs Rising Popularity”

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