Banking Law

As Democrats in Congress gear up to push through the return of seller-funded downpayment assistance (DAP) for FHA loans in 2009, at least one "top cop" with plenty of skin in the game thinks that's a really bad idea. HUD's inspector general, Kenneth Donohoe, spoke to a recent SourceMedia Mortgage Fraud Conference recently about the impact of fraud on the subprime mortgage meltdown. While he thinks that putting as many mortgage fraudsters behind bars as the jails will hold will send a message to crooks, he also thinks that we may not have yet seen the worst of the fraud, although we've seen "the tip of the iceberg."

"I like to think we've finally seen the iceberg, but I'm still not sure," he said.

I like to think that when we've finally seen the iceberg, we're not sailing on the Titanic, but I'm still not sure.

What worries him even more than past fraud is what lies ahead.

The inspector general said that, given the depth of fraud, he is particularly worried about the ability of the Federal Housing Administration to undertake the heavy load of refinancings that lawmakers are asking the agency to handle, especially since "lenders are made whole, leaving the FHA to take the hit."

Of course, that's the plan: rescue the big lenders, particularly those in a swath from D.C. to NYC and a few choice spots elsewhere (Charlotte, North Carolina, for one), then socialize the losses. The rest of the banking business, and all of the mortgage borrowers, can fend for themselves. As for the FHA, the paln may be to make FHA loans "the new subprime."

Mr. Donohoe does see some hope, however, in a couple of recent events, one being the demise of seller-funded downpayment assistance for FHA loans.

Two recent actions that might save the FHA are an increase in penalties against anyone who acts to defraud the agency - up to 30 years in prison and $100 million in fines - and the prohibition of down payment assistance to borrowers from anyone who has a stake in the sale, according to Mr. Donohoe.

"Down payment assistance has been a magnet for all kinds of fraud schemes," he said. "If it was allowed to continue unabated, it would not have been just a nail in FHA's coffin, it would have killed it."

Unfortunately Ken, when it comes to killing the FHA, there's always next year. Even without Congress or DAP, "motivated" borrowers will always find a way, legal or not.

Have a nice Bird Day. See you next week.