Housing advocates fault lenders' use of FHA loans

November 13, 1994|By Lorraine Mirabella | Lorraine Mirabella,Sun Staff Writer

Mortgage lenders are making a practice of approving marginal loans to meet reinvestment requirements in the inner city, leading to high default and foreclosure rates and deterioration of once-stable Baltimore neighborhoods, housing advocates say.

Instead of reducing their risk by putting borrowers into federally insured mortgage programs, lenders should help buyers get extensive pre-purchase counseling, approve conventional loans or reject the application, said researchers at Chicago-based National Training and Information Center and St. Ambrose Housing Aid Center in Baltimore.

Too often, "lenders are using FHA as a way to make their community reinvestment portfolio look better [but] not underwriting the customers as carefully as they would with a conventional loan," said Tom Chalkley, director of the Maryland Alliance for Responsible Investment, a coalition of 23 Baltimore-area organizations and community groups.

The 17-year-old Community Reinvestment Act (CRA) requires banks to show that their loan procedures do not discourage dTC people in poor neighborhoods from seeking to borrow money. In many cities, lenders show low foreclosure and default rates nationally but their rates jump as high as 40 percent in low-income areas, said Kurt Anderson, of the national training center.

But at least one lender blamed the economy for the number of foreclosures. "There is the pressure for CRA-type lending and pressure to make loans in certain areas," said Theodore E. Reichhart Jr., executive vice president of Maryland National Mortgage Corp. But he added, "It's not so much the underwriting the loans, it's the economic times."

By Department of Housing and Urban Development standards, one-third of the city's census tracts have problems with defaults, according to data released Thursday. It shows nine of 105 mortgage companies responsible for nearly 200 defaulting FHA-insured mortgages in inner-city areas between 1989 and 1991.

During those years, 5.9 percent of FHA loans in the city went bad, with lenders foreclosing on 1.7 percent of them. In those high-default census tracts, 8.4 percent of the loans were defaulted upon and 5 percent were foreclosed upon, according to information that mortgage companies supply to HUD.

Lenders are approving FHA loans for some borrowers who barely qualify and find themselves unable to afford payments when emergencies arise, Mr. Chalkley said. As homeowners move out, leaving homes vacant or in the hands of absentee landlords, crime mushrooms, houses fall into disrepair and property values plummet, he said.

Defaults on FHA loans have increased in Northeast Baltimore, which has eight tracts with high default rates, the data show.

"That was traditionally a stable homeownership area, and we've been noticing a steady decline since 1985," said Laurie Smith, who did research for St. Ambrose showing that half of HUD foreclosures in Northeast Baltimore in 1993 ended up as sales to investors. "This is the last area of the city that has maintained such a high level of homeownership. We don't want it to get to the point of boarded-up houses."

The groups hope to encourage more lenders to use conventional loans. They want stronger ties between lenders and a city network of pre-purchase mortgage counselors, with counselors' evaluations becoming part of the loan approval process. They also want HUD to give purchase price discounts to owner-occupants and nonprofit developers.

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