Sterling National Mortgage Co., Inc., based in Great Neck, NY, is among 15 FHA-backed mortgage lenders subpoenaed by the US Department of Housing and Urban Development (HUD) on Tuesday, January 12. HUD’s action is part of a continuing government investigation into lenders with high default rates and allegedly lax underwriting standards that have threatened the very solvency of the FHA. Congress has mandated that FHA capital reserves be at least 2% of their portfolio. They are currently at 0.53%. Meanwhile, their market share of new loans has jumped almost tenfold since 2006.
The subpoenas follow FHA’s revocation in early December of another New York-based lender’s license to make government-insured loans. Lend America in Melville, NY, closed operations on December 1, 2009, after FHA announced they would no longer insure their loans. The company was fined $512,000.00, and further civil and criminal cases could be forthcoming.
Loans made by the Lend America had default rates that were well over the national average. FHA-backed loans comprised over 90% of the company’s business, making it impossible for them to continue, and putting approximately 600 people out of work right before Christmas. Just as importantly of course, hundreds of borrowers were left stranded, many of them homebuyers in pending contracts with closing deadlines. Because Lend America had one of the lowest minimum credit score requirements in the industry, these borrowers had no place else to go, and faced losing thousands of dollars in lost contract deposits and other costs.
According to several former Lend America employees with whom I spoke, the lender had taken corrective actions in the previous 12-18 months in an attempt to bring their default rates down (and almost certainly to satisfy an increasingly selective appetite of investors who purchased their loans in the secondary market). This included raising minimum credit scores for approval from 500 to 550, and then from 550 to 580. They stopped lending to borrowers who had any mortgage lates within the last 12-24 months (even with compensating factors and strong explanations for such lates), and tightened debt-to-income ratio requirements. Lend America would even purchase an insurance policy on behalf of first-time homebuyers or borrowers under a certain credit score that would pay their mortgage for up to 6 months within the first year of the loan should they lose their job. The moves proved to be too little, too late.
Lend America’s problems were not limited to the borrowers they chose to approve. They were having difficultly funding loans on time, or in some cases even funding them at all. Borrowers would close on a refinance, only to discover days or weeks later that their previous mortgage lender had not been paid off. This likely contributed to why FHA took such drastic action against them in particular.
One should not, however, paint with too broad a brush, or jump to conclusions about lenders who have been not been accused of any wrongdoing or mismanagement. lenders subpoenaed on Tuesday have not been so accused, and HUD has specifically stated this is only an investigation. While there are certainly bad actors in the industry, as in any industry, most lenders by and large are making good-faith efforts to write quality loans in an ever-changing, increasingly restrictive lending environment. The FHA has made significant changes to guidelines and regulations, and continues to do so. A spokesman for Sterling Mortgage, Brian Hickey of CJP Communications in NYC, stated “Sterling National Mortgage Corporation (SNMC) received a request…from the HUD Inspector General’s office, to review 20 mortgage files. The 20 files requested represent loans originated in 2007 and early 2008 and come from a pool of over 3,600 FHA loans that SNMC has closed since 2007. All these loans met then-current FHA guidelines.” [Sterling Mortgage’s full statement is reprinted at the bottom of this article.]
We are still in the midst of a massive market correction in the mortgage industry. The subprime boom saw irrational lending criteria. Loan products that are considered laughable today, just a few years ago were common and accepted. Many bad loans were written, and many homeowners still have mortgages they cannot afford, or are just one ARM reset away from foreclosure. It has been and will continue to be an arduous process getting those loans out of the system. Some will be able to refinance into more affordable and secure terms, and many already have. Foreclosures and short sales will continue to play a significant role (and modifications to a lesser extent). Government solutions, such as the Making Home Affordable program rolled out by the Obama Administration, have not shown substantial results. The deep recession has widened the problem. As unemployment has risen, borrowers who once could afford their mortgages, and may have had perfectly sensible and safe loans, are now also in danger.
The correction we are undergoing unfortunately directly involves the very homes in which millions of Americans are raising their families, as we all try to build stable, prosperous communities. This has made it particularly painful. Yet it has also taught us (or rather reminded us) of some very important lessons in fiscal responsibility. Those lessons have been hard-learned, and are slowly being implemented by lender, borrower and government alike. The mortgage lenders will be vital to our economic recovery – without them there would be no housing market at all. Responsible lenders providing safe, affordable loans to responsible borrowers will be the foundation of that recovery.
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Statement from Sterling National Mortgage Corporation:
Sterling National Mortgage Corporation (SNMC) received a request on Tuesday, January 12, in the form of a subpoena, from the HUD Inspector General’s office, to review 20 mortgage files. The 20 files requested represent loans originated in 2007 and early 2008 and come from a pool of over 3,600 FHA loans that SNMC has closed since 2007. All these loans met then-current FHA guidelines. It is important to note that, according to HUD, more than 1,033 of these types of subpoenas were issued in 2009. In the press release issued by HUD, the Inspector General Kenneth M. Donohue states clearly, “We aren’t making any accusations at this time, we have no evidence of wrongdoing….” SNMC has procedures in place to ensure the integrity of our mortgage operation and we intend to cooperate fully with HUD throughout this process. SNMC takes very seriously the integrity of its operations and processes and looks forward to satisfying any and all questions.