Quicken Loans is a main stay around Cleveland, with our beloved Cav’s owner Dan Gilbert owning the Cav’s and sitting at the helm of Quicken Loans. There was a news story that Quicken Loans agreed to settle a law suit paying FHA $32.5 million for bad loans. What was missing from the headlines was FHA paid nearly $500 million in claims relating to Quicken Loans originated loans.
This brings me to the topic that has bothered me for nearly 20 years, and its mortgage insurance and how it works. FHA is a federally backed mortgage insurance program. It exists to pay the bank when the borrower defaults on the mortgage. It works like this. Borrower takes an FHA backed loan and makes a small down payment on the purchase of a home. This program has good intentions, it allows first time borrowers to buy a home without a conventional 20% down payment. Most of these loans go on to be paid, as a result of refinance, sale, or payoff through its terms.
It is the ones that do not that are a problem. If the borrowers default, FHA pays the lender the full amount for the loan. All interest and principal owned on the loan, the bank has no real risk and also has no real desire to deal with the borrower or allow the property to be sold at short sale.
In a traditional lending model, the risk of loss as a result of default is on the lender. Mortgage insurance by the FHA switches that risk of default from the lender to to FHA (the Government). The program requires the lender upon default to foreclosure the property, receive a deed back at foreclosure, then deed the property to the Department of Housing and Urban Development (HUD). HUD then pays the mortgage off to the lender, so the lender is made whole. HUD then sells the property at public auction or some other method to recoup some of its money.
The issue this creates is the borrower is unable to avoid foreclosure. If the property is worth less than is owned on the house, selling the property is nearly impossible. Lenders have no incentive to accept a short sale, because they get paid either way, so what incentive do they have to do the work necessary to approve a short sale. In fact, the lender is forced to “attempt” it, under FHA servicing guidelines, but they really pay lip service to the process. They have a foreclosure process in place out of necessity and are going to get their money either way, so why devote the resources to a program of short sale, or other alternative to foreclosures. Moreover, the people that are going to be working in these departments are not going to be your best and brightest employees.
Even the lenders that do have quality people to assist, are unable to move many loans through the FHA loss mitigation programs because there are too many steps and no real decision makers. In other words, there is no person who’s job it is to determine whether a particular solution makes sense.
In addition, the foreclosure attorneys who generally are in charge on the program are getting paid based on FHA guidelines, and ultimately that money is coming from FHA, and the Attorneys don’t get paid in full, unless they complete the foreclosure process.
The entire system is tipped in favor of foreclosure. The borrower typically has no choice but to be foreclosed upon and often times file bankruptcy. The option for a short sale approval are limited for sure. As a title agent and real estate attorney I can tell you countless stories of situations where houses have offers and fair market value and the deals can not close because FHA or the lender servicing FHA (or Fannie Mae or Freddy Mac) will not respond to the offer or accept a short sale. They then turn around spend multiple thousands more in interest, attorney fees, re-marketing, and sale of the property, only to receive thousands less than the short sale offer in a sale months later. This is a truly stupid and broken system.
FHA, VA, Fannie Mae, Freddy Mac, these are the entities that have made it so difficult to deal with mortgage defaults. They are also the all arms of the United States Government. They also touch a huge percentage of the loans in America. This deal between Quicken Loans and FHA, is a cost of doing business for Quicken Loans (.02 percent of their business since 2007) for the borrowers on the wrong end of these loans, its a much bigger loss.
If the Department of Justice really wants to protect the American People from fraud and abuse, they need to look at FHA, VA, Fannie Mae and Freddy Mac’s loan servicing practices. They will find thousands of cases of abused borrowers, who lost much more than .02% of their world.