Citing excessive default rates on government-insured home loans, particularly in low-income and minority city neighborhoods, a coalition of housing advocates is demanding that the Department of Housing and Urban Development turn up the heat on lenders who put people in homes they can't afford and don't do enough to keep them there.
Despite its responsibility to borrowers, the Federal Housing Administration "continues to do business" with the worst lenders, with the result that too many families lose their homes, National People's Action charged in releasing a new study documenting high default rates in 22 major cities.
"We need HUD to truly enforce" its system for monitoring and terminating lenders with inordinately high default rates, said NPA Chair Inez Killingsworth. NPA also called for similar programs to monitor real estate agents and appraisers who are associated with a high level of defaults and are part of what it terms "the three-headed monster" which persuade unsuspecting buyers to purchase poorly maintained houses with inflated values.
The study by the National Training and Information Center, a Chicago-based not-for-profit resource center for grassroots community groups, found that between 1996 and 2000, default rates were higher in the low-income census tracts of 21 of the 22 cities surveyed than in middle-income census tracts.
It also found that defaults were greater in minority census tracts than in white census tracts in 19 cities.
In Chicago, the default rate in low-income neighborhoods was 13.6 percent, 56 percent greater than the 8.7 percent rate in middle-income tracts. And in minority tracts, the default rate was 13.3 percent vs. 5.3 percent for white neighborhoods, according to the study.
Moreover, for every FHA borrower who actually lost a home in a white area of Chicago,three in a minority tract lost theirs.
Maintaining that HUD is committed to helping families keep their homes, FHA Commissioner John Weicher said the use of data that is more than two years old "in part obscures" more recent trends in defaults and the disposition of foreclosed properties.
According to HUD, its inventory of real estate owned has been reduced by more than a third since 2000. And at the end of fiscal year 2001, the agency said, FHA claim rates - families who lose their homes - were at their lowest levels in a decade.
The FHA is traditionally the lender of last resort for home buyers who are unable to secure financing from conventional lenders. The agency doesn't make loans directly; rather, it insures private lenders against the possibility that these higher-risk borrowers don't make their payments as promised.
But because the FHA insures 100 percent of the risk, lenders have no liability. And when they file a claim, they are off the hook.
"The FHA continues to do business with the top lenders behind these high default rates," the report claimed. "These lenders then reap the rewards of full reimbursement (and) neighborhoods are left with abandoned buildings and families without homes."
"All the abandoned homes are killing our neighborhoods," added Ruthie Bobb of Eastside P.R.I.D.E. in Buffalo, N.Y.
According to NPA, the FHA paid more than 63,000 insurance claims to lenders totaling more than $5.6 billion in fiscal '01.
While the default rate for non-government loans runs around 1 percent, 6.4 percent of all FHA loans made in the 1996-2000 study period were in default as of April 2000, the report said. At the insistence of NPA, a long-time critic of FHA policies, and with its input, HUD created Credit Watch several years ago to identify lenders with high default rates. But the threshold is too high, the Chicago-based group now says. It wants HUD to step up enforcement by reviewing the default and claims rate on all FHA loans every three months and analyzing the performance of every lender's branch offices.
It also has asked HUD to lower the Credit Watch threshold so that more high default lenders are no longer allowed to make FHA loans. A mortgage is considered in default if it is more than 90-days past due.
Currently, lenders with default rates at least three times the average for the area are supposed to terminated. But NPA wants the benchmark reduced to twice the area's default rate.
According to the study, some lenders in six of the cities canvassed had individual default rates at least double the city-wide rate. Most, it said, still write FHA mortgages.
Additionally, the group wants HUD to create similar programs to protect home buyers from unethical realty professionals and appraisers.