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Center, Washington Post Probe Raises Questions About Risks to FHA’s Insurance Fund
Who’s Being Helped By Non-Profit Offering “Mortgage Payment Protection?”
WASHINGTON - April 19 - A Washington, DC-based nonprofit, which says it helps cash-strapped homeowners avoid foreclosure, is under investigation for instead helping lenders make high-risk loans that leave the Federal Housing Administration on the hook if they go bad, according to a joint investigation by the Center for Public Integrity and The Washington Post.
The story, "Straining the FHA's Umbrella," examines the activities of The Rainy Day Foundation, a 501(c)(3) charity which federal officials are concerned may be thwarting the FHA's effort to weed out lenders who make precarious loans. For a fee of about $600 per borrower paid by lenders, homebuilders, and real estate firms to cover the cost of making mortgage payments for distressed borrowers, Rainy Day promises to limit defaults during the two years after a loan is made, the period most closely watched by the FHA.
But some lenders and housing experts say this type of "payment protection service" postpones rather than prevents defaults, and allows lenders to make riskier loans. "Keeping problematic lenders in the FHA program longer than they would otherwise is clearly going to end up costing the FHA more," said Mark A. Calabria, director of financial regulation studies at the Cato Institute.
In one case, the Department of Justice alleged that the Rainy Day program was used by a major FHA lender, Lend America, to conceal fraud. In a civil lawsuit filed last October, prosecutors alleged that the non-profit was used to hide "borrowers' inability to keep up with mortgage payments during the first two years of a loan." The investigators labeled Rainy Day a "mortgage lender-funded slush fund."
The Department of Justice has an ongoing investigation into the Rainy Day Foundation, according to source familiar with the matter. Officials at the Department of Housing and Urban Development are studying payment protection plans to determine whether they pose a risk to the FHA's insurance fund.