Donovan announces plans to reduce fraud and risk in FHA

U.S. Housing and Urban Development Secretary Shaun Donovan told a Senate appropriations subcommittee today that the Federal Housing Administration needs additional resources to ensure FHA can continue to meet the needs of underserved borrowers during the current mortgage crisis. Donovan also testified that he recently reactivated a program to dispatch teams of investigators to conduct on-site reviews of lenders, especially those whose refinance portfolios are showing signs of distress and abnormally high default rates.

Donovan emphasized that every effort is being made to reduce risk and confront fraud in FHA's single-family mortgage insurance programs. To read the full text of Donovan's testimony, visit HUD's website.

"For FHA to realize its full potential to respond to the current mortgage crisis, it will require additional resources and development of new and innovative reform initiatives," said Donovan. "The recent mortgage market meltdown has provided ample evidence that we must work to rethink each and every aspect of the nation's housing finance system."

In addition to the Agency's normal lender monitoring procedures, FHA plans to increase unannounced on-site inspections of lenders to further reduce the risk of fraud. In FHA's mortgagee letter, lenders are reminded the Department expects a strict adherence to FHA's underwriting standards to ensure lenders:

* Implement and maintain a comprehensive quality control plan
* Review all loans with early payment defaults
* Do not engage in false or misrepresentative advertising
* Fully document the stability and amount of borrower(s) income
* Do not charge excessive and unallowable fees to the borrower

Donovan also appealed to Congress to appropriate additional funds next year to allow FHA to hire more staff to handle the tremendous surge in loan activity. FHA's role has grown substantially from three percent of lending activity (by dollar volume) in 2006 to approximately 30 percent of all mortgages originated today. But while FHA is currently handling this increased loan volume and managing the accompanying risk, Donovan also cautioned about the challenges facing the mortgage insurance fund.

Donovan said, "Like many federal domestic agencies, FHA has suffered under the penny-wise and pound foolish priorities of the previous Administration. FHA was stagnant, limiting its ability to maintain adequate staffing levels and invest in state-of-the art technology. Repeated budget stalemates and resulting uncertainty of future funding levels undermined the ability to implement long-term organizational improvements."

HUD is the nation's housing agency committed to sustaining homeownership; creating affordable housing opportunities for low-income Americans; and supporting the homeless, elderly, people with disabilities and people living with AIDS. The Department also promotes economic and community development and enforces the nation's fair housing laws. More information about HUD and its programs is available on the Internet at www.hud.gov and espanol.hud.gov.