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HUD Disputes Findings on FHA First Payment Defaults

HUD Disputes Findings on FHA First Payment DefaultsHUD data conflict with Washington Post findings

March 10, 2009

By MortgageDaily.com staff

Earlier this week, a news story was published that indicated first-payment defaults on government-insured mortgages were skyrocketing. But government data obtained by MortgageDaily.com indicate that the rate of early defaults has actually eased.Monthly originations of loans insured by the Federal Housing Administration reached 130,082 in December 2008, according to data provided to MortgageDaily.com today by the U.S. Department of Housing and Urban Development. Activity soared from 100,516 in November and 61,472 in December 2007.

Back in January 2007, only 25,980 FHA loans were originated.

For all of 2008, 1,389,020 FHA-insured mortgages were originated, HUD said. Activity exploded from just 524,736 loans during 2007.

First-payment defaults on FHA-insured mortgages were 1.9 percent during November 2008, HUD’s data indicated

The rate of borrowers who missed their first payment fell from 2.0 percent in October 2008 and 2.3 percent in November 2007, the report said. First payment defaults were as low as 0.9 percent in June 2008 and as high as 3.1 percent in September 2007.

HUD’s data indicated that the rate of borrowers who missed their first three payments was 0.52 percent in August 2008 — the most recent month for which data was available. The rate was 0.51 percent in July 2008 and 0.82 percent in August 2007.

“We look at total loans originated in each month,” HUD spokesman Brian E. Sullivan explained about the data, “versus how many of those loans missed their first payment or missed their first three payments.”

But the figures conflict with findings from an analysis of government data reported Sunday by the Washington Post. That story indicated 9,200 first-payment defaults occurred during the past two years on loans originated by 2,300 FHA lenders.

“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,” the Post story said.

In a phone interview, Sullivan raised doubt about the newspaper’s findings and stood behind the data provided to MortgageDaily.com. He said he expects to review their data soon.

The Post also noted that refinances accounted for around 20 percent of early defaults and quoted HUD Inspector General Kenneth Donohue as saying that a loan with an early-payment default “clearly suggests impropriety and fraudulent activity.”

But HUD firmly disputes the notion that first-payment defaults are all tied to fraud.

“These data represent a fraction of our loan volume and, unlike statements to the contrary, do not exclusive[ly] indicate fraudulent behavior,” Sullivan said. “In addition, we’ve found some of these early defaults are attributable to sloppy underwriting, and not necessarily part of an orchestrated campaign to defraud the insurance fund.”

He said the economy has also had a major impact on early defaults.

He suggested that the inspector general sometimes sees mortgage fraud where it doesn’t exist and said a much better indicator of mortgage fraud is the rate of borrowers who become 90 days delinquent during the first six payments. That rate declined to 1.49 percent in July 2008 from 2.15 percent the prior month and 3.24 percent the prior year.

FHA delinquency of at least 30 days, excluding foreclosures, was reported last week by the Mortgage Bankers Association at 13.73 percent as of Dec. 31, 2008, jumping from 12.92 percent three months earlier and 13.05 percent 12 months earlier.

At least two FHA lenders have recently tightened guidelines on FHA loans originated by mortgage brokers because of rising delinquency.

Over at Wells Fargo & Co., credit scores were increased on third-party government originations in January.

And wholesaler Taylor, Bean & Whitaker Mortgage Corp. recently tightened its FHA and VA underwriting guidelines. Taylor Bean Chairman Lee B. Farkas told MortgageDaily.com in a January statement, “The tightening is due to increasing delinquencies in our GNMA portfolio.”

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