In a recent review of more than 250 loans from 15 lenders, HUD’s Office of the Inspector General (OIG) determined that 49 percent of those loans were non-compliant with FHA guidelines and were likely to cost the FHA insurance fund $11 million or more[1]. OIG recommended that HUD bring suit against each lender who violated lending regulations by misstating borrower income, employment history, assets, liabilities, credit history or investments, and reported that such suits could result in “affirmative civil enforcement actions of more than $23 million.” OIG is holding HUD responsible for some of the problems, however, reporting that “HUD missed critical opportunities to recover losses relating to noncompliant loans.” The report also criticizes HUD’s failure to “pursue civil remedies when lenders falsely certified to using due diligence in approving FHA loans”[2].

OIG suggests that a formal process be instated for reviewing all claims paid on defaulted mortgages – particularly those that meet “high-risk criteria.” This could help prevent payout on loans that OIG believes “never should have been insured.” HUD responded that it took such steps in 2010, but this may have been a little late given the rampant underwriting issues that are plaguing nearly all lenders today.

Do you think that lenders should face lawsuits for improper underwriting if HUD insured the loans at the time?

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[1] http://www.dsnews.com/articles/hud-losses-from-noncomplying-fha-loans-top-11m-2011-03-09

[2] http://www.mortgageorb.com/e107_plugins/content/content.php?content.7974