“We will be relentless in our investigation of corporate and financial wrongdoing, and will not hesitate to bring charges, where appropriate, for criminal misconduct on the part of businesses and business executives.” These were the words of Attorney General Eric Holder, quoted in a Nov. 17 press release announcing that President Barack Obama has established, by Executive Order, an interagency Financial Fraud Enforcement Task Force whose job is to combat financial crime.
“FHA [Federal Housing Administration] will not tolerate lenders who violate our rules and prey on those who depend on a reverse mortgage to continue to live independently,” said FHA Commissioner David Stevens in a press release on Oct. 30 when HUD announced taking action against a reverse mortgage lender in Hawaii. Commissioner Stevens continued, “FHA-approved lenders must understand that we mean business when it comes to protecting the FHA insurance fund from those who cut corners and take advantage of unsuspecting senior citizens.”
In another press release, announcing action taken against a large national FHA lender on Oct. 20, Commissioner Stevens stated, “If we determine that our partners are not playing by the rules, they’ll cease being our partners. It’s not just about protecting the financial health of the FHA insurance fund—this is about protecting each and every family that looks to the FHA for safe and secure mortgage financing.” In this same press release, HUD announced the proposed sanctions and penalties against individual underwriters and alleged that “these underwriters falsely certified to the Department that the loans were originated in compliance with FHA requirements and were eligible for FHA mortgage insurance.”
I think the above material pretty well speaks for itself … FHA is serious about ridding our industry of the crooks who take advantage of their clients, their employees and the agencies and companies they do business with.
Over the course of my career spanning the past 15 years, I have witnessed firsthand how FHA lenders come and go in the marketplace. I have lost several referral sources because of the thieves who walk among us. Here’s one example: Several years ago, I worked very hard to get into a particular real estate office. I finally got in for a presentation, impressed them with my knowledge of FHA and my ability to package the tougher deals. I soon became their main loan originator and was doing a great job for them, but the fact is there remained many deals I could not do because they simply didn’t meet FHA criteria. Before long, the referrals from this office ground to a halt and I wanted to find out why. I spoke to one of the agents who said that they had switched to another LO who “could get more deals done.” Something smelled fishy, and I researched a bit further, only to find that they were falsifying documents in order to get the loans insured. To assure the borrowers didn’t go into first payment default they would make the payments for the borrowers. Not able to compete with thieves, I stopped marketing to that office. The good—or bad news, depending on how you look at it—is that this lender’s default ratio grew so much that FHA started auditing their loans and eventually put them out of business.
Another company I couldn’t compete with would sell the loans to the aggregate lenders, but would hold the servicing rights to their loans. They would do FHA loans that didn’t meet FHA guides and, on numerous occasions, when a loan payoff came in, they would keep the money themselves and invest it for their own benefit, but keep making the payments to the investor with the interest they would earn from their profits. As long as the loan payments were made, the investors never knew the loan had been paid off. Pretty clever … so clever, in fact, that the owner of this company, along with the employee who collaborated with him in this scheme, are now in jail for the next six years.
I think we need to really study what works to keep default levels down, and strive to implement a plan that achieves this. In my opinion, a good place to start is to study a company in middle-America called Farm Credit Services of Mid-America (FCS), one of the country’s largest farm lending institutions based out of Louisville, Ky. When Greg Frost was unable to speak at their annual convention because of scheduling conflicts, he suggested that FCS contact me. My first thought after receiving their invitation to speak was, “What in the world am I going to say to a farm lending organization?” This was in April of 2008 at the height of the mortgage industry crash and they wanted someone who would explain what had happened in the non-farm mortgage industry, and how it happened, because while the mortgage industry at-large may have been crashing, their business was booming!
I’d like to share with you the qualities I found in FCS that shielded them from the crash and continues to keep their default rates low. In 2008, their default rate was only 1.2 percent, but there was concern that the price of corn would have a negative impact on their default rates. Sure enough, the price of corn went down this year by about 30 percent, and their default rate did increase … to 1.9 percent (yes, you read right)! When grain goes down, this equals a potentially significant drop in income for the farmers. When the result is a mere 0.7 percent increase in default rate, this can only reflect stellar lending practices. And despite the current downturn in the market, FCS has still experienced six percent growth from last year. This is a testament to the fact that their corporate culture is in and of itself the best loss mitigation tool.
After interviewing a number of people in the organization from the top executives, to operations staff and sales people, these are the 10 qualities that I believe represent the corporate culture at FCS:
►Strong relationships with clients
►Servicing the loans originated
►Loan officer accountability
►Selective TPO relationships
►Clients’ future dependence on loans
►Connection to the land
►The quality of the people they hire
You can see how much we can learn from my friends at FCS. And when you look at the history of FHA and the economic circumstances under which it started, you will find the same core qualities. I am pleased with the direction Commissioner David Stevens seems to be taking the FHA, I only hope that he and his staff not to forget the roots of FHA, thus turning it into just another “GSE.” FHA is about giving creditworthy Americans a chance at homeownership, and it’s FHA’s responsibility to put the systems in place to make that happen.
Jeff Mifsud founded Southfield, Mich.-based Mortgage Seminars LLC in 2004, has been an FHA originator for 12 years, is a contributor to LoanToolbox.com and is a former FHA underwriter.