FHA: The new Fannie Mae

They’re baaaa-aaack. The same people who engineered a global financial meltdown with bad loans covered by government backing have begun exploiting the Federal Housing Administration in the same manner as Fannie Mae and Freddie Mac.  Lenders who have bad track records in subprime loans have begun flooding FHA with questionable paper as part of the supposed rescue plan:

Thousands of subprime mortgage lenders and brokers—many of them the very sorts of firms that helped create the current financial crisis—are going strong. Their new strategy: taking advantage of a long-standing federal program designed to encourage homeownership by insuring mortgages for buyers of modest means.

You read that correctly. Some of the same people who propelled us toward the housing market calamity are now seeking to profit by exploiting billions in federally insured mortgages. Washington, meanwhile, has vastly expanded the availability of such taxpayer-backed loans as part of the emergency campaign to rescue the country’s swooning economy.

For generations, these loans, backed by the Federal Housing Administration, have offered working-class families a legitimate means to purchase their own homes. But now there’s a severe danger that aggressive lenders and brokers schooled in the rash ways of the subprime industry will overwhelm the FHA with loans for people unlikely to make their payments. Exacerbating matters, FHA officials seem oblivious to what’s happening—or incapable of stopping it. They’re giving mortgage firms licenses to dole out 100%-insured loans despite lender records blotted by state sanctions, bankruptcy filings, civil lawsuits, and even criminal convictions.

Ever see the movie Boiler Room, a decent hybrid of Glengarry Glen Ross and Wall Street?  At one point in the movie, the lead character figures out that the company has planned for a quick move and reincorporation in the event the SEC starts to figure out their scam.  Apparently, some of the subprime lenders have also seen this movie.

The Cugno family ran a subprime shop called Premier, which wound up losing its license in five states for its business practices and had one unit and its manager plead guilty to felony charges in its business practices.  Despite declaring bankruptcy in mid-2007, Premier has sold $250 million in loans to the FHA since then without informing the agency of the bankruptcy.  Now, though, the Cugnos have opened a new shop called Paramout Mortgage Funding — operating in the floor below Premier, and with an FHA license.

First Magnus Financial offered mortgages without income verification during the subprime boom years.  State and federal regulators went after First Magnus hard for its lending practices, and it finally shut down last year.  First Magnus’ executives reorganized as Stonewater Mortgage, in the same building that First Magnus leased, and now have an FHA license.

Lend America in New Jersey got an FHA license too, despite the track record of its chief business strategist, Michael Ashley.  He pled guilty to two counts of wire fraud in 1996 in federal court in connection with his family’s lending company, Liberty Mortgage.  He got probation, but his father got four years in prison.  Ashley now says, “It doesn’t affect my ability to do lending,” and he’s right.  His company also has a 5.7% default rate on its FHA loans, more than 50% above the national average.

Business Week has plenty of examples of this kind of shell game maneuvers in the FHA licensing pool.  We’re heading to yet another collapse through yet another government intervention in the lending market.  Until we stop encouraging the purchase of bad paper in order to achieve social policy, taxpayers will continue to be at risk, and we risk the collapse of Western economies.