Lenders generated $428M modifying defaulted FHA loans

FHA missed opportunities to strengthen its insurance fund

An audit of the Federal Housing Administration’s loss-mitigation program found that lenders generated $428 million modifying defaulted FHA loans, costing Housing & Urban Development.

“We initiated this audit due to our concern that FHA might have incurred costs while allowing lenders to make large amounts of money by modifying defaulted FHA-insured loans.  Our audit objective was to determine the extent to which loans modified under the FHA program generated gains for the lenders,” the report from the HUD Office of Inspector General concludes.

“We found that lenders generated an estimated $428 million in gains from the sale of Government National Mortgage Association securities when modifying defaulted FHA loans in fiscal year 2013,” the report states. 

These loan modifications were completed as part of FHA’s loss mitigation program. 

The report found that none of these lender-generated gains were used to offset FHA’s insurance fund costs. 

As a result, auditors concluded, the FHA missed opportunities to strengthen its insurance fund.

Lenders generated an estimated $428 million in gains from the sale of Ginnie Mae securities related to modified FHA loans. These loan modifications were completed as part of FHA’s loss mitigation program.

Lenders received these gains from modifying 67,048 defaulted FHA loans during fiscal year 2013 and packaging them into Ginnie Mae securities between September 2012 and April 2014. The sale of these securities was made possible by the FHA loss mitigation program.

When the original loans became delinquent, Ginnie Mae allowed the lenders to repurchase the loans for an amount equal to 100% of the loans’ principal balance.

After successfully undergoing loan modifications, these repurchased loans were eligible to be repooled in mortgage-backed securities. The lenders were able to obtain these gains as a result of the loan modifications completed as part of the FHA program.

FHA does not have requirements governing the use of the lender gains from the sale of Ginnie Mae securities nor does it have access to the details of these transactions.

Specifically, FHA does not impose any limitations on how the lenders use the gains from the sale of these securities or how much they can generate in gains. Lenders are free to sell the securities at a price the market will bear and are unencumbered in their use of these gains.

“We recommend that the Deputy Assistant Secretary for Single Family Housing perform a study of the loan modification program and evaluate whether any changes are needed, such as (1) developing procedures to offset lender gains from insurance fund payments, (2) reducing the allowable interest rate for loan modifications, and (3) examining the incentives paid to lenders modifying loans, to put $50 million to better use,” the report recommends.

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