Loosers

With the huge disaster that homeowners and lenders have suffered, it would seem reasonable to conclude that anyone wanting to buy a home would be very careful. Of course, those ads on glossy paper keep coming in advising you that great deals are available. Just trust your local financial whiz.

Unfortunately, enough buyers are getting sucked in that we have a new crisis, called Quick Defaults. Making one or less payment, the ill equipped buyers are finding they are over their heads in debt and leaving.

Many borrowers are defaulting as quickly as they take out the loans. In the past year alone, the number of borrowers who failed to make more than a single payment before defaulting on FHA-backed mortgages has nearly tripled, far outpacing the agency's overall growth in new loans, according to a Washington Post analysis of federal data.

Many industry experts attribute the jump in these instant defaults to factors that include the weak economy, lax scrutiny of prospective borrowers and most notably, foul play among unscrupulous lenders looking to make a quick buck.

If a loan "is going into default immediately, it clearly suggests impropriety and fraudulent activity," said Kenneth Donohue, the inspector general of the Department of Housing and Urban Development, which includes the FHA.
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The spike in quick defaults follows the pattern that preceded the collapse of the subprime market as some of the same flawed lending practices that contributed to the mortgage crisis are now eroding one of the main federal agencies charged with addressing it. During the subprime lending boom, many mortgage brokers and small lenders milked the market for commissions and fees by making as many loans as possible with little regard for whether they could be repaid.

Once again, thousands of borrowers are getting loans they do not stand a chance of repaying. Only now, unlike in the subprime meltdown, Congress would have to bail out the lenders if the FHA cannot make good on guarantees from its existing reserves. And those once-robust reserves are showing signs of stress, raising the possibility that taxpayers may have to pick up the tab for the first time since the agency was established in 1934.

More than 9,200 of the loans insured by the FHA in the past two years have gone into default after no or only one payment, according to the Post analysis. The pace of these instant defaults has tripled in one year.
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Dean Hackemer, president of Access National Mortgage, defended direct marketing, saying it increases competition among lenders and thus forces down interest rates for borrowers. He blamed his firm's rising defaults on a bleak economy that has cost some borrowers their jobs. But he added that many of the lenders now running into trouble with FHA loans were previously selling subprime loans and related Alt-A mortgages, which required no documentation.

Refinanced Back Into Trouble

Among FHA loans with instant defaults, the upward trend is especially pronounced in refinanced deals. The number of refinancings that defaulted after zero payments or one have more than quadrupled since then end of 2007 and now represent two-fifths of all instant defaults.

The FHA is attractive to borrowers looking to refinance, in part because the agency allows for cash-out refinances, a practice Apgar called "particularly problematic." It has become rare among conventional lenders, who fear that borrowers will take the cash and walk away from the loan.
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The FHA also permits "streamlined" refinancing, in which established FHA borrowers get lower rates without verifying their income. The thinking is that borrowers who are on time should stay that way if their rate drops.

Karmen Carr, a housing finance consultant for the FHA, said some mortgage brokers have been known to game the system. They coax homeowners to refinance repeatedly even though it's a costly process for the borrower, she said.

The tragedies keep mounting. Penalties for fraud should be redoubled, and regulation of lenders based on their inability to keep the borrowers they inveigle into taking out loans.

Bank regulators were charged with reporting patterns of consistent losses so that they could be investigated. The regulators for the most part failed to do this during boom times.

The lending industry has fallen into a pattern of making loans that are unsustainable. Weaning out the crooks is overdue.