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Mortgage agency's growth gives fuel to risky lenders
The trouble signs surrounding Lend America had been building for years. A top executive was convicted of mortgage fraud but still helped run the company. Home loans made by its headquarters were defaulting at an extremely high rate. Federal prosecutors alleged in a civil suit that the company falsified loan documents and committed fraud.

Yet despite these red flags, a little-known federal agency continued giving its blessing to Lend America, allowing it to do business in the name of the U.S. government. The Government National Mortgage Association, known as Ginnie Mae, authorized the firm to bundle its mortgages into securities and sell them to investors around the world -- all backed by U.S. taxpayer money.

Until last week, federal housing officials said that Lend America met requirements for participating in the program run by Ginnie Mae, an agency in the Department of Housing and Urban Development, and allowed the firm to sell more than $1 billion in mortgages via Ginnie Mae securities.

Lend America is hardly the only lender with a troubled record that Ginnie Mae has endorsed. The agency has provided taxpayer backing to at least 36 other mortgage companies with a history of reckless lending, fines or other sanctions by state and federal regulators or civil lawsuits, according to an analysis of government records, court documents and statistics in a HUD database.

Ginnie Mae's ongoing relationship with these firms allows them to swap the home loans they've made for new cash so they can make more loans, which can then be traded for even more cash to make even more loans. Housing experts say this dynamic turbocharges the type of bad mortgage lending that first helped trigger the financial crisis that battered global markets over the past two years. And ultimately, taxpayers are on the hook for the troubled mortgages.

"Ginnie is like an accelerant to a fire," said Anthony Sanders, professor of real estate finance at George Mason University. ...

...Sixteen mortgage lenders endorsed by Ginnie Mae have been cited by various federal regulators for unsafe banking practices, insufficient capital or other violations. Thirteen firms have been fined, sanctioned or ordered by HUD auditors to cover the cost of bad loans. Eight firms have FHA loan portfolios that are defaulting at double the rate of their principal competitors, which can be grounds for suspension from the FHA program. Another eight companies have FHA default rates more than 50 percent higher than the average in their area.

Premium Capital Funding of Jericho, N.Y., for example, is the subject of several lawsuits in federal court alleging that it misled borrowers about the terms of both traditional and FHA loans. Its default rate on FHA loans made in the past two years is 14.3 percent, or more than double that of other lenders in its area. The company's default rate has more than tripled in the past year, yet Premium was allowed to sell $78 million of Ginnie Mae securities from January to September, according to Inside Mortgage Finance. ...