Just when you were thinking it was safe to go back into the mortgage market, today’s Wall Street Journal is highlighting the next source of mortgage fraud, the Federal Housing Administration’s (FHA) reserve mortgage program. In a typical reverse mortgage, the bank sends the borrower a monthly check (or a lump sum payment at the beginning of the loan).
It seems that some creative individuals have figured they could deed a run-down house to an elderly individual, and then get a reserve mortgage on that property; leaving them with the cash and the government with the run-down worthless property. Of course, this requires getting an appraiser to go along with the value of the home, but since the Clinton HUD decided to do away with FHA control of appraisers and let the lender pick the appraiser, that sadly hasn’t been much of an obstacle.
The great thing for lenders is that if the loan goes bad, or the value of the house falls below the mortgage amount, FHA - backed by the taxpayer - picks up the tab. Of course, the borrower is required to pay an insurance premium to cover any potential shortfalls. But just like in any other federal insurance program, when these’s a shortfall beyond funds collected via premiums, we taxpayers are left on the hook. I could go on about what a great job Washington does running insurance programs; suffice to say, Washington does a pretty poor job.
If Washington were serious about cracking down on predatory lending and mortgage fraud, Congress should end the practice of allowing lenders to put 100% of their losses to the taxpayer. Maybe that would provide the correct incentives for the lender to actually make sound loans.