When it comes to fraud and abuse, government programs are always chasing their tail. In the private sector, businesses have a financial incentive to stop abuses before they happen. No such incentive exists with government programs. Instead, government officials usually uncover abuses after the fact.
A good example of this problem was recently covered by the Washington Post.
The Rainy Day Foundation advertises that it can help lenders remain in the FHA’s good graces. For a fee of about $600 per borrower, paid by lenders, home builders and real estate firms to cover the cost of making mortgage payments for distressed borrowers, the group promises to limit defaults during the two years after a loan is made, the period watched most closely by the FHA…[S] some lenders and housing experts say this kind of “payment protection program” postpones rather than prevents defaults and allows lenders to make riskier loans.The Justice Department has alleged, for instance, that the Rainy Day program was used by a major FHA lender, Lend America, in an attempt to conceal fraud. In a civil lawsuit filed against Lend America in October, the Justice Department charged that the company secured FHA guarantees for loans based on fraudulent underwriting, then paid Rainy Day to hide defaults by some borrowers. The suit said that the FHA is likely to lose millions of dollars as the borrowers eventually default.“The purpose of the Rainy Day Foundation was and is to conceal borrowers’ inability to keep up with mortgage payments during the first two years of the loan, the period of time that HUD monitors its Direct Endorsers’ delinquency and default rates,” the suit said. “Rainy Day purports to be a financial counseling program but on information and belief it is a mortgage lender-funded slush fund.”
In 1971, Time discussed a scandal at the Federal Housing Administration in which “real estate speculators used the program to make huge profits at the expense of the poor through what amounts to sheer fraud.” The article also discussed a scandal from the 1950s whereby “builders pocketed millions of dollars of unearned profit from mortgage loans that exceeded the cost of construction” under a federal program. The magazine concluded that “whenever the government writes a blank check to the housing industry, some sort of scandal is likely to result.”