Copyright 2002 The Washington Post


The Washington Post
May 21, 2002 Tuesday
Final Edition
SECTION: FINANCIAL; Pg. E04

LENGTH: 750 words

HEADLINE: FHA Criticized For Default Rates;
Coalition Calls for Expanded Oversight

BYLINE: Sandra Fleishman, Washington Post Staff Writer

BODY:


A coalition of longtime Federal Housing Administration critics is calling for tighter oversight of the federal mortgage program, citing high default rates in cities, particularly in minority and poor neighborhoods.

FHA mortgage borrowers in 21 of 22 major cities had higher default rates than the national FHA average between 1996 and 2000, according to a new study to be released today by National People's Action, a Chicago-based coalition of community groups. In eight of the cities, including Washington and Baltimore, the rate was more than twice the national average.

And homeowners in minority and low-income census tracts in almost all of the 22 cities went into default and lost their homes at higher rates than whites or middle-to-upper-income homeowners in those cities, according to the study, which was conducted by the National Training and Information Center of Chicago.

The community activists say those higher default rates show the Department of Housing and Urban Development and the FHA aren't doing enough to protect minorities and low-income home buyers from fraud and foreclosure. Through the FHA program, the government insures lenders against nonpayment, thus attempting to make mortgage money available to those who other lenders might view as too risky.

Community activists have long contended that the FHA has been lax in cutting off lenders with high default rates, as well as in addressing predatory loans targeted at blacks and low-income communities. They claim unscrupulous lenders too frequently collaborate with real estate agents who peddle deteriorated properties and with appraisers who inflate the properties' values.

"We've tried to work with HUD in the past administration to get some reforms," said Inez Killingsworth, co-chairman of National People's Action. "We have gotten some action, including one program, Credit Watch, that cuts off lenders, but . . . there is much more that needs to be done," she said.

Most troubling, she said, was that FHA "continues to do business" with lenders who have high default rates. The group recommends lowering the threshold for cutting lenders out of the FHA program. Currently FHA looks at lenders with default rates at least three times an area's average. Killingsworth's group wants the threshold at twice that rate.

HUD "recognizes the concerns raised in the report," Federal Housing Commissioner John C. Weicher said in a statement yesterday, "but disagrees with the conclusion." FHA foreclosure rates have fallen, he said, and the agency is trying to keep families in their homes.

HUD is working with other federal agencies in a national task force to investigate and prosecute fraud. And it has used Baltimore, a city known for its high foreclosure rate, as a kind of test laboratory for some actions. Baltimore is important politically, because it is home to Sen. Paul S. Sarbanes (D-Md.), chairman of HUD's oversight committee.

Weicher said HUD has cut off FHA business with 100 lender branch offices.

The critics say they welcome action, including an Appraiser Watch program similar to Credit Watch that is expected soon. The program will track default rates of appraisers. But they say not enough is being done.

Because FHA insures its loans against default, Killingsworth said lenders can wash their hands when fraudulent deals go down and take the insurance money. "The lender can't lose because FHA pays for 100 percent of the loss."

The result, say NPA activists, is abandoned homes and ruined neighborhoods, as well as lost federal money.

The new study found a national default rate of 6.4 percent in FHA loans made from 1996 to 2000. Default is defined as 90 days delinquent or in foreclosure. The default rate for non-government loans nationally is usually about 1 percent.

But the rates in 21 of the 22 major U.S. cities studied were higher than 6.4 percent. Eight had rates at least twice that. Baltimore's rate was nearly three times as high, at 17.8 percent. Washington's rate was 13.6 percent.

In Washington, an FHA loan in a low-income census tract was nearly twice as likely to default as a loan in an upper-income tract. The percentage of owners in low-to-moderate-income tracts who lost their homes was also nearly double that in middle-to-upper-income tracts.

In 21 of the 22 cities, the default rate was higher in low-income census tracts than in middle-income census tracts. In 19 of the cities, the default rate was higher in minority census tracts than in white tracts.

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