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Government May Owe $8.4 Billion on Fraudulent Loans

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Rat_Ludovic_Bertron_FlickrHalf of all mortgages insured by the Department of Housing and Urban Development (HUD) never qualified for insurance in the first place, according to a recent investigation by the agency’s own inspector general. That could force the government to pay at least $8.4 billion in unnecessary claims.

Borrowers received loans even though they failed to properly document their employment or income, their assets or debts, or even their credit histories. These “systemic problems” caused HUD to insure “loans that should not have been insured,” according to a report published March 2 by the inspector general.

Naturally, many of those loans went into default. But because HUD has no formal practice to review insurance claims on mortgages, the department wound up paying millions—and potentially billions—to compensate lenders for loans that didn’t qualify for insurance anyway.

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The government’s lax procedures also mean that lenders who fraudulently applied for FHA insurance may never face millions of dollars’ worth of fines, the report found.

The inspector general reviewed up to 20 loans from each of 15 different lenders. That represents just a tiny fraction of the 183,278 loans, worth $31.3 billion, that those lenders gave out between January 2005 through December 2009. During that time, the 15 lenders submitted a total of 6,560 insurance claims to the FHA on $794.3 million worth of failed loans.

But just in this small sample, 49% of the 284 loans surveyed did not meet the minimum requirements to qualify for FHA insurance, which is given to low- and moderate-income borrowers to help them afford a home.

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Many of those loans quickly failed. In 19 of the loans surveyed, the homeowners failed to make even a single payment.

Instead of investigating these loans, which had a suspiciously high rate of failure, HUD simply paid the lenders for all their claims. In the 284 loans surveyed in the report, that cost the FHA insurance fund $11 million in losses it never should have paid, the inspector general found. In addition, HUD’s failure to investigate helped the loan officers avoid $23 million in potential fines for fraud.

If the same problems found in the report apply to 49% of all of HUD’s FHA-insured loans made by these 15 lenders, it could mean that nearly 90,000 loans never should have been approved. That could force the government insurance fund to pay $8.4 billion in unnecessary claims.

Image: Ludovic Bertron

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