Are greedy wolves making government-insured mortgages?

January 15th, 2009, 3:00 am · 10 Comments · posted by Mathew Padilla

Now that subprime is a dirty word and Wall Street firms are no longer making securities backed by loans to people with low credit scores, brokers and bankers are filling the void with a little help from Uncle Sam. They are making loans insured by the Federal Housing Administration (FHA).

But who are these brokers and bankers doing FHA, which is meant to expand credit to folks of modest means?

John Courson, president of industry trade group the Mortgage Bankers Association, recently testified before the House Financial Services Committee on FHA, raising a red flag on the program (emphasis added):

“FHA is back. It’s gone from a mere 3 percent share of the market just 18 months ago, to a healthy 20 percent today. That’s quite a rebound, and it’s where we believe FHA should be.

But as we applaud FHA’s turnaround, that increase in volume is a double-edged sword that requires FHA and FHA-approved lenders to be more vigilant than ever about who is allowed to originate FHA loans. Much like you, we are concerned that some unscrupulous lenders may now be turning their attention to FHA and its programs.

The speech, which you can read HERE, reminded me of BusinessWeek magazine’s Dec. 1 cover with the headline: “The Subprime Wolves are Back.”

The story, which I found a little over-the-top, argued that unscrupulous players in the subprime world are now doing FHA. But if the head of the banking industry’s trade association is warning Congress about practitioners of FHA lending, maybe there are numerous dodgy characters out there.

BusinessWeek focused on Jerry Cugno, founder of Premier Mortgage Funding in Clearwater, on the Gulf Coast of Florida. This company has a horrible track record, with 9.2% of its borrowers going into default. And FHA was unaware Premier had filed for bankruptcy.

Cugno’s family has founded another company, Paramount Mortgage Funding, which is doing FHA. Cugno’s daughter explains…

“My dad’s company got too big,” says Nicole Cugno. “It was too hard to control.” At its peak in 2006, Premier originated $1 billion in loans each month and had annual revenue of more than $200 million. It sold what amounted to franchises to brokers around the country who frequently operated with little supervision from the 200-employee home office. “Everybody had a few bad apples, and I had a few of them,” Nicole’s father, Jerry, says. “If they got in trouble, we fired them.”

Read the full article HERE. Let’s hope BusinessWeek is overstating the case. If the magazine is correct, I sense yet another taxpayer funded bailout … of FHA.

And in other news…

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Ryan Gable says:

January 15, 2009 at 8:00 am

I think any comparison of FHA loans to subprime loans is not a valid comparison. You need to have a job, reasonable debt-to-income ratios, and the property has to be liveable in order to for the property to appraise. Subprime loans, all you needed was a heartbeat. In the second quarter of 2008, over 8% of all foreclosure starts were subprime. FHA? Less than one percent: http://www.mortgagebankers.org/NewsandMedia/PressCenter/64769.htm

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mortgagemaker says:

January 15, 2009 at 8:09 am

Once again - the same old story. Wall Street didnt get into trouble for backing sub prime loans, they got into trouble for backing all types of loans based on bad collateral….. Wall Street buying mortgage loans with a collateral that has subosedly increased 300% in 12 years and 200% in the last 6 of those years, is a Wall Street with no regulation.

Jack says:

January 15, 2009 at 9:03 am

Can wolves be greedy? or just hungry.

OCAppraiser says:

January 15, 2009 at 9:14 am

I came across some properties yesterday in San Clemente. $700k+ price points, and found some to have been purchased with FHA loans and, yep, you guessed it, only 3% down on 800k house.

I guess the Feds wont rest until they manage to bring down the ENTIRE financial system, including the Feds themselves.

Grab a pitchfork everyone. And replace the locks on your doors.

This will AGAIN, not end pretty.

OCTrojan says:

January 15, 2009 at 9:19 am

I have found Businessweek to be conservative in its reporting and less sensationalistic. If they allude to a “problem”, then I’m pretty confident it’s real and not overstated. Are we so naive as to believe “it can’t happen again already??”

Please, the current exploitation sounds very likely. Why? Simple: when times are very hard and difficult, the wolves work harder than ever to make a buck, any buck. Makes complete sense to me.

Congress is like a 5 year old toddler that believes anything and loves shiny things. We have fools making decisions for us.

Peter Samuel Cugno says:

January 15, 2009 at 9:32 am

I met this thug Jerry on the phone about 4 years ago, thought he might be a relative - we wasn’t. Thankfully he and his compnay (Premier) got what they had coming … but snuck in the back-door later I see, now to doing FHA. He won’t last there either.

To help you focus on this Matt, FHA has been the bastion of MANY Many many people who have had their licenses revoked and done jail time for how they operated doing FHA transaction (it’s the ‘blue-suade’ shoe side of the industry) - as far back as I can remember. Courson’s assertion that most of the bad acrtors in subprime jumped into FHA is absolutely correct - watch their delinquencies & losses and you ‘ll see that for yourself :-}

Louis says:

January 15, 2009 at 10:00 am

can any of you out there tell us what amounts are being paid for SRP these days?

BeyondTheMargin.net says:

January 15, 2009 at 11:19 am

HELLO! Government subsidized loans with preferential terms were the root cause of the problem in the first place (combined with unrealistically low interest rates thanks to Greenspan) — sound familiar??? 4% mortgages… pls!

http://www.beyondthemargin.net/

Liar Loan says:

January 15, 2009 at 2:06 pm

Mathew,

Business Week would never, EVER print anything over the top…. Please…..

Well, they did print this article called, “Sex, Lies, and Subprime Mortgages.”

http://www.businessweek.com/magazine/content/08_47/b4109070638235.htm

But they were only reporting the facts…. that’s it. No sensationalism here….

AK says:

January 15, 2009 at 3:36 pm

FHA had 14-15% of the SFR market throughout the ’90s (source: huduser.org) so the growth in FHA lending seems like “reversion to the mean.”

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