Federal Housing Administration announces probe of 15 lenders with high default rates

Government officials probe 15 FHA lenders

WASHINGTON — Federal housing officials on Tuesday served subpoenas on 15 mortgage companies with suspiciously high default rates for loans backed by the Federal Housing Administration. The actions are part of a broad crackdown on dubious lenders as the agency tries to stem losses.

After the housing market went bust, the FHA became the major source of funding for first-time homebuyers. But the agency, which insures roughly 30 percent of new loans, has seen its losses rise dramatically. While the agency has avoided a taxpayer rescue so far, its reserves have sunk below the minimum level required by Congress.

There also have been fears that subprime lenders have shifted their business to the FHA after the subprime business went bust.

The agency has already taken action against several problem lenders. One of the nation’s biggest mortgage bankers, Taylor, Bean & Whitaker Mortgage Co. of Ocala, Fla., was banned from the FHA program in August and filed for Chapter 11 bankruptcy protection. Another mortgage company, Lend America, was kicked out in November.

On Tuesday, Department of Housing and Urban Development’s inspector general, Kenneth Donohue, said he wanted to determine why defaults are so elevated among the 15 companies being probed and whether any have committed fraud.

“Many of these target loans didn’t last but a short time before defaulting,” Donohue said. “We will conduct an investigation, if appropriate, to determine who is responsible and will recommend that appropriate action be taken against individuals and corporations.”

The FHA does not make loans, but rather offers insurance against default. Borrowers are willing to pay for the insurance because FHA loans only require down payments of 3.5 percent of the purchase price.

The lenders targeted by FHA officials include some of its worst-performing active lenders. For example, almost one in five loans made by Alethes LLC of Lakeway, Texas, over the past two years went into default, compared with a national average of about 5 percent.

“We are reviewing each of these files to determine what commonalities there are, if any,” said Danny Smith, president of Alethes, wrote in an e-mail. He later added that the subpoena requested “information which has already been provided.”

Two other FHA lenders being scrutinized, Alacrity Lending Co. of Southlake, Texas and Pine State Mortgage Corp. of Atlanta, each had default rates of about 15 percent.

“We intend to comply and get as much information to them as fast as we can,” said Lonnie Brantley, chief executive of Alacrity.

The government inquiry, he said, applied to a small portion of the company’s loans, and attributed the company’s high default rate to “bad economic times.”

Pine State Mortgage could not be immediately reached for comment and the company’s Web site was down Tuesday afternoon.

The largest lender under the FHA’s magnifying glass was First Tennessee Bank, a subsidiary of Memphis, Tenn.-based First Horizon National Corp.

A spokesman said the company sold its mortgage division in August 2008 and scaled back dramatically on new FHA loans since then. That could be artificially inflating the company’s default rate because the company is making fewer new FHA loans.

The crackdown was welcomed by John Courson, chief executive of the Mortgage Bankers Association. “We’re concerned about the viability of the program and we want to make sure that the bad apples and the bad players, frankly, are eliminated,” he said.

__

AP Real Estate Writer Adrian Sainz contributed to this report.