Copyright Mortgage Bankers Association of America May 2009New U.S. Housing and Urban Development (HUD) Secretary Shaun Donovan announced during testimony before Congress on April 2 that the agency is stepping up the number of "unannounced on-site inspections of lenders" to reduce the risks of Federal Housing Administration (FHA) lending fraud. In testimony before a Senate appropriations subcommittee, Donovan also said FHA needs additional resources to ensure that the program can continue to meet the needs of underserved borrowers in the mortgage crisis.
According to a HUD press release, the secretary "recently reactivated a program to dispatch teams of investigators to conduct on-site reviews of lenders, especially those whose refinance portfolios are showing signs of distress and abnormally high default rates."
The unannounced visits by regulatory SWAT teams will be in addition to HUD's normal lender-monitoring procedures. Donovan also urged the appro- priations subcommittee "to ap- propriate additional funds next year to allow FHA to hire more staff to handle the tremendous surge in loan activity. FHA's role has grown substantially from 3 percent of lending activity [by dollar volume] in 2006 to approximately 30 percent of all mortgages originated today."
The new HUD secretary pointedly underscored the differences that the new administration has with the outgoing administration. The HUD press release notes that Donovan told the Senate subcommittee: "Like many federal domestic agencies, FHA has suffered under the penny-wise and pound-foolish priorities of the previous administration. FHA was stagnant, limiting its ability to maintain adequate staffing levels and invest in state-of-the-art technology. Repeated budget stalemates and resulting uncertainty of future funding levels undermined the ability to implement longterm organization improvements."
But putting disputes over appropriate funding levels aside, FHA is also facing a spike in defaults, which triggered some headlines raising concerns over whether there are appropriate risk controls in the program. No doubt some of these headlines were partially behind the move by HUD to step up its unannounced on-site inspections and other fraud-fighting measures.
The Wall Street Journal (WSJ) online edition ran a story titled "Defaults Rise on Home Mortgages Insured by FHA" that said FHA loan defaults in February were up from a year ago. The story quotes an FHA spokesman saying the rate of seriously delinquent FHA loans at the end of February 2009 was 7.5 percent. That is up notably from the 6.2 percent rate that prevailed one year ago. Seriously delinquent loans are defined as those 90 days or more past due, in the foreclosure process or in bankruptcy.
The rise in seriously delinquent FHA loans, if not addressed, raises concerns for the FHA mortgage insurance fund. The 
Washington Post ran a front-page story on March 8, 2009, that further called attention to the stress that is being put on the FHA single-family insurance program. The article stated, "In the past year alone, the number of borrowers who failed to make more than a single payment before defaulting on FHA-backed mortgages has nearly tripled, far outpacing the agency's overall growth in new loans, according to a Washington Post analysis of federal data."
The WSJ story indicated, "The cities with the highest FHA default rates in December were Punta Gorda, Florida, at 18 percent; Detroit, 15.6 percent; Flint, Michigan, 15.1 percent; Fort Myers-Cape Coral, Florida, 15 percent; and Elkhart-Goshen, Indiana, 12.1 percent, according to a HUD report."
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