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Back on September 23rd I opined that the sleazy operators in the mortgage business would find a way back into the game, just as they always have in the past. After all, many of the guys who got the country into the Savings and Loan mess at the end of the last century are the same ones turning up in charge again in the current mortgage meltdown. They are the slick operators who understand how to game the system to make a buck. They wrote most of the bad business that was then packaged up and “monetized” as derivatives by the Wall Street companies that have since gone out of business or been bought up.

Well, last week's Business Week magazine reports that the sleazeballs have repackaged themselves, many changing the name of their operations, and now are in the process of writing bad FHA-back loans. The Business Week article carried the opinion that the next wave of failures that will need to be bailed out will be of FHA-back loans.

At issue are the same practices that got the mortgage industry into trouble in the first place – slick operators writing bigger loans for houses than the borrowers can really afford. The FHA-backed loan process was set up to help people who otherwise might have difficulty getting loan to qualify for the mortgage by having the government (FHA) guarantee the loan. This has attracted the slick-Willy operators in the business like flies to an open garbage can. One reason is that the FHA organization is currently overwhelmed by requests. FHA-backed loans went from about 4% of US mortgages in 2007 to 26% this year. The FHA just can’t handle the workload and police the issuers, too; many of whom are failed sub-prime lenders who just changed their name and shifted to FHA loans from their old line of bank-backed loans.

So, the Business Week article concludes that sometime soon the FHA will be lining up for a taxpayer bailout. The default rate has reportedly already climbed to 5.7%, which is 53% higher than the national average; and, cases of fraud are on the increase as the wolves in this business learn how to game this system. There doesn’t appear to be any end to the cycle of sleazy operators finding new ways to get around rules and common sense and to do bad business, at least not when at the end of every tunnel there is a taxpayer bailout waiting.

It’s time for some major perp-walks and prosecutions, and to allow some major bankruptcies; and, then to enact some good, common-sense oversight regulations. How many times are we going to put up with the likes of the Dewey, Cheatum and Howe Mortgage Company figuring out new ways to write bad mortgages on our dime.