Foreclosure Crisis Mired by Failing FHA Reserves

The Federal Housing Agency by overextending its insurance benefits has guaranteed loans of many people whom other private lenders would not generally have entertained. But these borrowers are now defaulting in large numbers causing the reserves of FHA to drop dangerously.

Kenneth Donahue of HUD said, “It might be we’ll get ourselves out of this and that everything will be fine, but I don’t paint that rosy a picture. They’re banking on the fact that the economy will continue to improve, that the housing market will begin to sustain itself.” He observed that if the private lenders had increased their down payment conditions in the past two years it gave rise to the inevitable question of “what does the F.H.A. think it is doing by asking only 3.5 percent?”

One of the beneficiaries of the generosity of FHA is Chaz Fullenkamp – an automotive technician residing in Columbus. He received a FHA loan although he was somehow managing his finances. He commented, “If I got unemployed, I’d be wiped out in a month or two,” he says. Thanks to the F.H.A., however, he is better off than he used to be.” He used the insurance coverage of FHA to purchase a foreclosed house last spring paying $179,000. The seller was so eager to dispose of it that he bore the closing costs and on top of that put into Fullenkamp’s pocket $2,500 in cash. Fullenkamp then immediately applied for rebate in taxes and came out well ahead. He admitted, “I knew in my heart I could not really afford the house, but they gave it to me anyway. Wow, I’m surprised I pulled that off.”

While on one side the number of loans has surged ahead the controlling checks on quality have gone down say the staff members of FHA. Donohue quoted many instances of organized fraudulent testimony being placed before the Congress early this current year. Speaking at an interview Donahue said, “They need to stop taking bad loans in the door. They’re taking on all this volume, they have to have very active underwriting standards.”

Another beneficiary was Bernadine Shimone. If she had failed to get the loan she would have remained a tenant. In any case she used up her retirement savings and hardly had money for closing costs. The house she moved into was covered with trash and she had to spend a lot of time clearing the mess. Was it such a good idea to give Shimone a loan? Even she does not fully agree as her mortgage payment eats up half her monthly income.

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