Center, Washington Post Probe Raises Questions About Risks to FHA's Insurance Fund

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.