FHA Remains Vulnerable To Residential Loan Fraud.(Federal Housing Adminsitration)

Mr. Donohue is the inspector general for the Department of Housing and Urban Development. This viewpoint is an excerpt from his recent congressional testimony before a House Financial Services Subcommittee.

Of all homes purchased in the United States each year, 8% are financed with FHA mortgage insurance. Each year FHA accounts for 30% of all insured mortgages. FHA activity has fallen off nearly 20% from the same period a year ago. FHA insured mortgages may be more prone to mortgage fraud because FHA insures mostly first-time homebuyers with limited credit histories and little money down.

A closer look at the makeup of the FHA portfolio would indicate that FHA's insurance risk is increasing. A comparison of active insured FHA cases to FHA claims cases over the past two years shows an increasing claim rate. As you can see from our chart, our investigative workload is increasing with more than 450 open criminal single-family investigations and our arrests in the single-family mortgage area have increased by 800% in a four-year period. We believe there is a direct relationship between our increasing workload and FHA's increasing claims rate.

The annual audit of the Federal Housing Administration's financial statement has found the FHA in basically sound fiscal condition. FHA's claims rate, however, continues to rise each year and with fewer FHA mortgage applicants there is less premium income to cover the claims.

A future economic downturn and/or future interest rate increases would provide opportunities for those who would prey upon homeowners who cannot make their mortgage payments.

We repeatedly have found unlawful and deceptive practices and outright fraud in mortgage lending that often exploit first-time and uninformed FHA borrowers.

Of particular concern is the illegal profiteering on the purchase and quick resale of homes called "property flipping." The illegality arises because one or more parties to the transaction conspire to inflate the value of the home and then pocket the excessive profits at loan closing.