(Update2) “Zero Pay” Defaults On the Riseby Tim Manni
Most of us are familiar with the high default rate that accompanies a large percentage of modified mortgage loans, but you may not have heard about the growing number of “zero pay” defaults on mortgages insured by the Federal Housing Administration. A “zero pay” defaults occurs when a borrowers fails to make even one payment on their loan. While the occurrence seems unlikely, it’s a growing concern that has many industry officials worried:
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.
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. By last fall, more than two dozen FHA home loans on average were defaulting this way every day, seven days a week.
Last Monday’s issue of National Mortgage News said, “The trend, which Lisa Gore, the assistant special agent in charge of the criminal investigation division in HUD’s Inspector General’s office, called ‘a huge red flag’ that some type of fraud has been committed, is similar to the one experienced in the 1999-2001 housing market downturn.”
Under the FHA’s own rules, there’s a presumption of fraud or material misrepresentation if loans default after borrowers make no more than one payment.
William Apgar, senior adviser to new HUD Secretary Shaun Donovan, agreed that early defaults are a worrisome sign that a lender is abusing FHA-backed loans.
Malfeasance is of such concern to the Obama administration, he said, that Donovan’s first meetings at HUD were about ramping up measures to combat fraud.
Update1: According to National Mortgage News Online (NMNO), “Housing secretary Shaun Donovan said the government is sending out ‘SWAT teams’ unannounced to check up on problem lenders.” Donovan fears many of the “bad actors” who once operated in the subprime market have now shifted their lending to FHA loans.
The FHA market is growing rapidly by the day. According to NMNO, there are now 36,000 approved FHA brokers — up 20,000 in less than two years. There are now 3,300 approved FHA lenders in the U.S., an increased of 525% in just three years.
This fraud should be of particular concern to taxpayers as more and more less-qualified borrowers are being filtered into the FHA market. The FHA’s influence in the marketplace has gone from two percent three years ago to nearly one third today. As these numbers grow, so does the risk placed on taxpayers.
Update2: First payment defaults are only second to “zero pay” defaults in terms of predicting potential fraud and loan performance. On page 17 of the OCC and OTS’ 39-page fourth quarter mortgage metrics report, you can view both a chart and a graph depicting the first payment defaults for all mortgage loans in each category.