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No Basis for Public Confidence: More Mortgage Missteps

What you hear again and again about the unfolding of the economic meltdown is that it all started with bad home mortgages.  Profit-hungry mortgage brokers, banks and other financial institutions eagerly promoted various kinds of mortgages that consumers could not really afford or deserve.  Home-hungry Americans took advantage of what was being pushed on them.  What now is beyond belief is that those greedy, criminal elements in the private sector have continued to take advantage of the mortgage system, and the government has not prevented it.  Quick defaults have received little attention.  What are they?  They are mortgages that borrowers do not even pay more than one payment on.

This has been happening since the mortgage fiasco started more than a year ago.  As reported by the Washington Post this month: "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.  By last fall, more than two dozen FHA home loans on average were defaulting this way every day, seven days a week."  They tripled in the past year alone.  The number of refinance mortgages that defaulted after zero payments or just one has more than quadrupled since then end of 2007 and now represent 40 percent of all instant defaults.  Instant defaults have mounted much faster than ordinary types of defaults.                                                                                         

Only FHA-approved lenders offer these FHA backed mortgages.  The FHA share of the mortgage market has skyrocketed, increasing from about 2 percent three years ago to nearly a third of the mortgages made after the subprime market collapsed.  This happened because FHA loans became the main option for many borrowers who lack a large down payment or excellent credit ratings.

How is it possible that lenders could be giving mortgages to borrowers without scrutinizing the financial capacity of borrowers?  All of us that have received mortgages or refinanced them have had to supply an incredible amount of information and documents to demonstrate our financial capability to pay the mortgage debt.  So, how is it possible that currently people are getting mortgages that they may even get cash back from without ever paying either the first payment due or perhaps only that first payment?

It sounds incredible.  These are mortgages that the federal government, meaning taxpayers, assure lenders that they will not lose money on if the mortgage holders default.

Logically, there are three possible explanations for a huge number of quick defaults: the weak economy causing people to lose jobs, inadequate scrutiny of prospective borrowers, and even more likely, greed-driven criminal behavior by unscrupulous lenders looking to make a quick buck, despite all the publicity about the mortgage crisis.

This is what Kenneth Donohue, the inspector general of the Department of Housing and Urban Development, which includes the FHA said: "If a loan is going into default immediately, it clearly suggests impropriety and fraudulent activity."  So how could all this be going on?  After all, under FHA rules, there's a presumption of fraud or material misrepresentation if loans default after borrowers make no more than one payment.

The mortgage crisis happened because mortgage brokers and lenders exploited the market for commissions and fees by making as many unsupportable loans as possible, even though there was clear evidence that they could not and would not be repaid.  And it never stopped apparently despite the unraveling of the whole economy.  Mortgage brokers are some of the biggest crooks in the universe, assembling phony information to fool lenders and the FHA.  So where the hell is the government regulation and oversight to stop such awful behavior?  Why no prosecutions of mortgage brokers and lenders that drove the economy down the toilet?

President Obama and so many other leading politicians keep talking about restoring public confidence, but why should the public have confidence in anything the government is doing when this kind of fiasco is allowed to happen in a key federal agency?  It is too easy just to focus on the larger than life thieves like Bernie Madoff that steal billions of dollars, while ignoring the many hundreds of immoral and evil mortgage brokers and lenders that keep finding new ways to game the system.  FHA guarantees home mortgage loans, but no one is guaranteeing honesty in the mortgage sector.  Enough already.  Heads should be rolling at FHA.

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Joel S. Hirschhorn has succeeded as: a full professor, University of Wisconsin, Madison; a senior staffer, U.S. Congress (Office of Technology Assessment); head of an environmental consulting company; Director of Environment, Energy and Natural Resources, National Governors Association; now an author and consultant. Recent books are: Sprawl Kills - How Blandburbs Steal Your Time, Health and Money, and Delusional Democracy - Fixing the Republic Without Overthrowing the Government. He has published hundreds of articles in newspapers, magazines, journals and on many web magazine sites. He has given hundreds of talks at a wide range of conferences worldwide. He focuses on American culture, politics and government, and health issues.