“Why crisis era mortgage defect rates cited by the government (and others) are false, a massive Red Herring. Part 2: FHA’s Post-Crisis Quarterly Loan Review Findings, from 2012 to 2016 are one of two Smoking Gun documents that are both publicly-available from FHA itself, that definitively proves this contention of mine…

…How so? I first uncovered this issue in the Fall of 2014, in reading a mortgage industry newsletter that highlighted high, material underwriting error/mortgage defect rates on Q1-2014 FHA-endorsed (insured) mortgages. That set off a big alarm for me and I blogged about it at the time. See the link to Statement #410 below. You must read #410 to understand this blog posting. But because I, nor anyone at IndyMac, was ever accused of underwriting mortgage defects, I didn’t pursue it further at the time. I am now. I have attached the link to the source Q1-2014 FHA document (FIRST SMOKING GUN FHA DOCUMENT) just below. This document shows very high and material mortgage defect rates (48% unacceptable/material defect and only 16% acceptable or conforming) doesn’t it? Even higher than pre-crisis ones claimed by the DOJ/FHA in their recent, April 2016, settlement with Wells Fargo and much higher than the mortgage defect rates claimed in the recent Goldman Sachs’ PMBS settlement. So what’s going on here? First, you must read blog posting Part 1, before you read this Part 2, where I lay out the logic as to “what’s going on.” As I noted and explained in that Part 1 posting, these are just “initial” quality control findings. FHA even says that in the preamble to the document, included just below. However, I believe FHA misstates and confuses, when it also says in that preamble that “unacceptable is a material defect at the time of endorsement” and therefore implies it can’t be resolved or cured by the lender, possibly with just an explanation and/or missing document and/or possibly with assistance from the borrower or others. The fact of the matter is that isn’t true and FHA itself evidences that it isn’t true, when you compare the FIRST SMOKING GUN FHA DOCUMENT (1SGFD) below to the SECOND SMOKING GUN FHA DOCUMENT (2SGFD). You will just have to trust/believe me for the moment (until I post Part 3), but here are the numbers. In the 1SGFD just below, 6,645 loans were reviewed by FHA in Q1-2014 and 48% were deemed unacceptable (material defect) by FHA. Beyond just the illogic of this is occurring so far AFTER the mortgage crisis and after mortgage lenders had supposedly reformed/improved (see #410), the fact is that FHA, as lenders and their advisors, explain and/or respond to these initial findings, FHA reduces/rescinds their initial material findings, quite significantly. How significantly? For the entire year 2014, FHA had an initial unacceptable/material mortgage defect rate of 47.53% (10,979 loans) and yet a FINAL unacceptable rate of just 5.81% (1,341) loans, of which lenders appropriately indemnified FHA against loss on 1,274 of them.  Let’s wrap up here. The headline initial material mortgage defect rate was 47.53% in 2014 and was reduced by a whopping 88%, as a result of initial findings (Hearsay evidence, see Part 1 blog posting), being converted to facts, as a result of the normal adversarial process (which is common in industry QC finding disputes) in business contract disputes.  The adversarial process did not occur with crisis era initial mortgage defects, a fact I will discuss in more detail in Part 3. P.S. Full disclosure, the data on FHA’s Quarterly PETRs (1SGFD) doesn’t quite reconcile with the data on the PETR Quarterly Loan Review Summary (2SGFD) and even the data within 2SGFD doesn’t quite reconcile, but hey it’s the government….”close enough for government work”, as my dad liked to say….and it doesn’t change the conclusion I document here in any way.” Mike Perry, former Chairman and CEO, IndyMac Bank

FIRST SMOKING GUN FHA DOCUMENT: Link to FHA’s Quarterly Loan Review Findings; all Single Family Post-Endorsement Technical Loan Reviews (PETRs) conducted by FHA between December 31, 2013, and March 31, 2014 (on page 3-4 of 5). This report reflects the initial rating of each file reviewed during the quarter. A loan rating of unacceptable may change if the lender provides mitigating documentation to FHA. Even if a rating is subsequently mitigated, an initial rating of unacceptable indicates the loan endorsement file exhibited a material defect at the time of endorsement.


October 7, 2014 – Statement 410: “Again, the truth is finally emerging. FHA’s audit of mortgage loans insured by them in Q1 2014 apparently has uncovered huge, “material” underwriting error rates. If this is true, it goes a long way to disprove the mainstream view that pre-crisis mortgage underwriting deficiencies were a material cause of mortgage (and mortgage securities) losses during the financial crisis…

April 12, 2016 – Statement 1150: “What do you think of the Wells Fargo settlement last Friday? As I understand it, Wells “admitted” to the claims in the settlement, but its “non-response” press release seems like a denial? The government’s harsh claims (that Wells was a poor underwriter of FHA mortgages over a long period of time, that Wells intentionally defrauded FHA by not disclosing QC findings for years, and that Wells’ poor underwriting of FHA loans caused people to lose their homes..) seem mostly false to me, knowing the Democrats/liberals in charge of our government the past 7 years have a goal of cementing blame on Wall Street/the Banks/mortgage lenders for the crisis…

Posted on June 9, 2016, in Postings. Bookmark the permalink. Leave a comment.

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