HUD warns losses endanger mortgage program

A HUD auditor Friday warned that the Federal Housing Administration's mortgage program is facing mounting losses from defaults and that the agency lacks the staff and quality-control procedures to stem the hemorrhaging.

In testimony before the House Financial Services Committee, Assistant HUD Inspector General James Heist said the "once fairly robust" program's reserves for covering losses has dropped 40 percent to $12.9 billion -- or 3 percent of total FHA-backed mortgages -- in the last year as the agency has recouped market share with the bursting of the subprime mortgage bubble.

"If more pessimistic assumptions are factored in, the ratio could dip to below 2 percent in succeeding years, requiring an increase in premiums or congressional appropriations intervention to make up the shortfall," Heist told the committee.

Heist said part of the problem was that the agency lacked the staff, the computer muscle and risk-assessment procedures to eliminate the fraud perpetrators from the thousands of lenders who have been flocking into the program since the subprime collapse. He noted that in 2008 the agency approved the application of an Arizona company operated by the previous owners of a firm that had its license suspended by state banking investigators for violations and subsequently went bankrupt several years ago. In other testimony, Phillip Murray, assistant FHA secretary for single-family housing, strongly denied that his agency had been lax in its screening of lender applications but admitted that it needed more authority, staff and computer capacity to bolster its "aggressive oversight" of the program. "The sky is not falling but ... we must have more tools," Murray said. He said that in the case of the Arizona company he lacked the legal discretion to deny its owners access to the program on the basis of "guilt by association with the now-defunct company.

But some of the committee members vented their frustration with what they believed was the failure of FHA enforcement. "Based on what we see, the bad actors are moving over the FHA because the subprime money has dried up," said Rep. Maxine Waters, D-Calif. She expressed incredulity that FHA could not know the difference between legitimate lenders and the hustlers. Murray conveyed to the committee his agency's continued opposition to the Democratic-sponsored proposal to allow bankruptcy judges to "cram down" the mortgage terms for troubled borrowers to allow them to keep their homes. He said letting judges modify mortgages "will add uncertainty for investors and mortgage markets, which will lead to higher interest rates for borrowers.