Under pressure from Congress and its own Inspector General, HUD is beefing up its efforts to weed out unethical lenders participating in its booming FHA mortgage programs.

Last week HUD announced sanctions against more than 120 lenders for violations ranging from falsifying loan documents to quality control problems. The agency imposed $1.5 million in f penalties and kicked 102 lenders out of the FHA program entirely.

HUD Secretary Shaun Donovan announced the moves and said, "We expect, and more importantly American home buyers deserve, that when they deal with an FHA-approved lender, they're dealing with (a company) they can trust."

Donovan's announcement came after release of a highly-critical report by the department's independent Inspector General, who said the agency had been ineffective in pursuing and punishing bad lenders.

The Inspector General said that since last October, FHA's mortgagee review board, which has the legal power to hit lenders with massive penalties, had only placed three lenders on probation, suspended two others, and stripped four lenders of their right to do business with the agency.

Sen. Charles Grassley, a Republican from Iowa and a frequent critic of FHA, called the review board "a toothless tiger" and said U.S. "tax dollars are at risk" because too many lenders are sending FHA high-risk loans for insurance, and the agency is not able to weed them out.

FHA loans are by far the fastest-growing segment of the real estate market -- moving from less than a three percent share in 2005 to an estimated 30 percent or higher share today. FHA loans are crucial for moderate-income and first-time buyers because downpayments can go as low as three and a half percent, and credit standards are more generous than available through Fannie Mae or Freddie Mac.

To deal with perceptions that FHA is not tough enough on monitoring and disciplining lenders, Donovan and FHA commissioner Brian Montgomery are initiating a series of reforms. They include beefing up staffing and improving computer systems that monitor loan performance and quality.

Montgomery has also begun fielding what he calls "SWAT" teams of investigators and compliance experts to swoop down on lenders whose loan quality isn't up to snuff.

Recently-approved congressional legislation also gives the agency expanded authority to go after bad actors - identifying and barring companies whose officers have been convicted of felonies or who are under indictment for financial or real estate criminal offenses.

The agency is also taking hard looks at advertisements for FHA financing because of widespread deceptive practices - including illegal marketing of FHA loans by brokers or lenders who are not approved by the agency.

Published: June 1, 2009

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Kenneth R. Harney writes an award-winning, nationally-syndicated column on housing and real estate from Washington, D.C. He is also managing director of the National Real Estate Development Center, a professional education company. He is a past member of the Federal Reserve Board's Consumer Advisory Council, a committee that by federal statute reviews all Fed actions on home mortgage, consmer credit and banking industry regulation. He served as a member of the U.S. Department of Housing and Urban Development's Working Group on Computerized Loan Origination (CLO) systems, and is a member of the Editorial Board of the Fannie Mae Foundation's journal, Housing Policy Debate. He is the author of two books on mortgage finance and real estate.