There has been a huge spike in defaults on government-backed mortgages in which the borrower never sends in a single payment, a Federal Housing Administration (FHA) investigator has revealed.
The large number of so-called “zero payment” defaults is “a huge red flag” indicating fraud, Lisa Gore, who leads the criminal investigation unit in HUD’s Inspector General’s office, said at a banking conference in Las Vegas.
Her office is investigating a large number of fraud cases, even one case involving more than 100 separate loans, she said.
Over 9,200 FHA-insured loans have defaulted after zero or just one payment in the last two years, according to the Washington Post. With the number of instant defaults tripling, an average of over two dozen loans a day went bad.
Observers blame unscrupulous lenders and lax oversight. FHA has greatly expanded its market share, from 2 percent of mortgage originations three years ago to almost a third of the total.
That tremendous growth has strained its ability to police lenders and check loans and it bodes ill for the increasing number of new government-insured loans the administration hopes will bail out the flagging housing sector.
“Within the next 12 to 18 months, there is going to be FHA-insurance Armageddon,” Gary E. Lacefield, a former federal mortgage investigator, told Business Week in November.
Defunct subprime lenders who made risky loans, for instance, have resurfaced as FHA lenders.
One subprime lender, who had his license revoked by five states and was disciplined by another four, pleaded guilty to fraud-related charges, according to Business Week.
Still, that lender went on to issue FHA loans.
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