Report details HUD failures to protect FHA insurance fund from bad loans

Friday, March 4th, 2011, 11:25 am


The Department of Housing and Urban Development missed critical chances to recover up to $11 million in losses to the Federal Housing Administration‘s insurance fund on bad mortgage loans, according to a report from HUD’s Office of Inspector General.

The Inspector General raises concerns about systemic problems with the underwriting of FHA-insured loans and the resulting costs to the FHA insurance fund “for loans that should not have been insured.”The office’s Operation Watchdog initiative began last year to review the underwriting of 15 FHA direct endorsement lenders with default and claim rates outside the norm.

The Office of Inspector General found these lenders did not properly underwrite 140 of 284 loans reviewed, or 49%, because they weren’t following FHA requirements. For the 140 loans that did not meet FHA requirements, the borrowers made an average of only five payments before defaulting.

Direct endorsement lenders are mortgage lenders who were allowed to underwrite and close loans without prior HUD review to simplify the process of obtaining FHA mortgage insurance.

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