Lend America Faces Probe for Alleged Fraud on FHA Loans

The Wall Street Journal reported late last week that the government was investigating Lend America ("Lend America Faces Probe for Alleged Fraud"), a NY-based mortgage lender, for falsely certifying borrowers that received $14 million in FHA-backed loans.

Anyone in the New York area has probably seen their commercials, set in the style of a breaking news flash, encouraging borrowers to refinance into FHA-backed loans. According to the WSJ article, Lend America is the 22nd largest FHA lender by volume, having originated some 11,300 FHA mortgages over the last 2 years, with defaults on their mortgages running 2-3x the national average.

The investigation follows on the heels of HUD’s suspension of mortgage lender Taylor, Bean & Whitaker in August, which subsequently filed Chapter 11 only days later. Up until its filing, Taylor Bean was the third largest originator of FHA mortgages and the 12th largest mortgage lender in total.

While small in comparison to the total mortgage market, the recent problems at Lend America and Taylor Bean reflect the rampant fraud that has been occurring at the FHA (not dissimilar to what we saw unfold in subprime in early 2007). With the government-controlled entity insuring approximately 25% of new mortgages, investors should remain deeply skeptical as to the sustainability of the apparent bottom in housing.