BluefoxToday blog : Mortgage lenders in HUD's crosshairs over high FHA insurance claims

FHA-insured home loans have carved a large chunk of the market during this prolonged housing meltdown. Conventional mortgage lenders have withdrawn in large numbers into the shadows to get TLC from the government just to be able to survive. Many have plain vanished from the scene, generally swallowed by a little stronger bank.

FHA has become the favorite of first-time home buyers for its more lenient underwriting guidelines and lower down payment requirements. Its programs, however, are open to all applicants and many refinances have been done through it. Since FHA started gobbling up market share a couple of years ago, to some degree it stepped into the subprime vacuum left by conventional mortgage providers, real estate values have continued to lose ground in most areas of the country and that has caused scores of its insured home loans to go sour. Borrowers often found themselves upside down in a matter of months after closing if they only put down the minimum of 3.5% allowed by FHA and quickly became vulnerable to drawing a distressed status label.

Now HUD - US Department of Housing and Urban Development - has begun a review of mortgage lenders, actually already served them subpoenas for documents and information, who have a "significant" amount of claims against the FHA mortgage insurance program. HUD suspects there is more to the high default rates than just declining prices. It's looking closely at each mortgage lenders' underwriting practices to determine whether further action is needed. The list of the 15 home loan lenders receiving the subpoenas can be found here.

Climbing foreclosure numbers at FHA have forced HUD's hand. With these subpoenas it's looking into possible fraud as one of the reasons to FHA's problems. It is also determined to manage risk better from here on out. Its actions will obviously create a tighter mortgage approval regime, thus to some degree dampen demand, delaying any meaningful housing rebound. Yet, it's better to have a solvent FHA issuing mortgage insurance at a slower pace than none at all.