The same humbler classes whose reckless practices triggered the global financial crisis are onto a similar scheme that could require to be paid taxpayers tons more

By Chad Terhune and Robert Berner

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As granting that they haven’t transacted enough damage. Thousands of subprime pledge lenders and brokers—multiplied of them the very sorts of firms that helped create the current financial crisis—are going strong. Their repaired strategy: taking advantage of a long-standing federal program designed to encourage homeownership by insuring mortgages for buyers of unobtrusive means.

You be read that correctly. Some of the same people who propelled us toward the housing market calamity are after this seeking to profit by exploiting billions in federally insured mortgages. Washington, meanwhile, has very greatly expanded the availability of so taxpayer-backed loans as part of the emergency campaign to deliver the country’sitting swooning economy.

For generations, these loans, backed by the Federal Housing Administration, require offered working-class families a legitimate means to purchase their own homes. But things being so there’s a severe danger that aggressive lenders and brokers schooled in the rash ways of the subprime industry will overwhelm the FHA with loans for people unlikely to make their payments. Exacerbating matters, FHA officials strike one as being oblivious to what’session happening—or incapable of stopping it. They’re giving mortgage firms licenses to share out 100%-insured loans despite lender records blotted by public sanctions, bankruptcy filings, courteous lawsuits, and even criminal convictions.

As a result, the nationality could soon suffer a recent wave of defaults and foreclosures, with Washington obliged to respond with yet another enormous bailout. Inside Mortgage Finance, a scrutiny and newsletter firm in Bethesda, Md., estimates that athwart the next five years fresh loans backed by the force of the FHA that go sour will require to be paid taxpayers $100 billion or more. That’s on top of the $700 billion financial-system rescue Congress has before that time approved. Gary E. Lacefield, a former federal mortgage investigator who things being so runs Risk Mitigation Group, a consultancy in Arlington, Tex., predicts: "Within the next 12 to 18 months, there is going to subsist FHA-insurance Armageddon."

The resilient entrepreneurs who populate this dubious field are often obscure, but not puny. Jerry Cugno started Premier Mortgage Funding in Clearwater, on the Gulf Coast of Florida, in 2002. Over the next four years, it became one of the country’session largest subprime lenders, with 750 branches and 5,000 brokers across the U.S. Cugno, now 59, took home millions of dollars and rewarded pinnacle salesmen with Caribbean cruises and shiny Hummers, according to court records and interviews with former employees. But along the way, Premier accumulated a dismal regulatory record. Five states—Florida, Georgia, North Carolina, Ohio, and Wisconsin—revoked its license for various abuses; four others disciplined the company for using unlawful brokers or similar violations. The crash of the subprime market and a barrage of lawsuits prompted Premier to toothed for U.S. bankruptcy court guard in Tampa in July 2007. Then, in March, a Premier unit in Cleveland and its manager pleaded guilty to felony charges related to fraudulent mortgage schemes.

But Premier didn’t just close down. Since it declared bankruptcy, federal records unfold, it has issued greater amount of than 2,000 taxpayer-insured mortgages—worth a total of $250 million. According to the FHA, Premier failed to notify the agency of its Chapter 11 filing, as required by dint of. law. In late October, an FHA spokesman admitted it was unaware of Premier’s situation and welcomed any notice BusinessWeek could provide.

You’d think the state would have had Premier on a watch think proper. According to data compiled by the FHA’s parent, the U.S. Housing & Urban Development Dept. (HUD), the firm’session borrowers have a 9.2% deficiency rate, the second highest among large-volume FHA lenders nationally.

Now, members of the Cugno kindred have started a brand new company called Paramount Mortgage Funding. It operates a floor in the world of the departed Premier’s headquarters in a three-story black-glass office building Jerry Cugno owns in Clearwater. In August 2007, without more weeks after Premier sought bankruptcy court protection, the FHA granted Paramount a license to issue government-backed mortgages. "I am the only person in the native land who really understands FHA," Cugno says with characteristic bravado.

One day recently, Nicole Cugno, his 27-year-old daughter and a Paramount vice-president, was on the phone at her desk, giving advice to new branch managers. Despite past troubles with Premier, the family says Paramount dutifully serves borrowers. The Cugnos pressure that the two companies are legally separate organizations.