U.S. will get tough with sloppy lenders

Nation's Housing

They'll be accountable for excessive defaults

May 16, 1999|By Kenneth R. Harney

IN A MOVE that could provide stronger consumer protections for more than 1 million new homebuyers a year, the federal government plans to take a novel, get-tough approach with lenders: It's going to hold banks and mortgage companies responsible for the number of buyers they finance who fall into default or foreclosure within 24 months of closing.

For those lenders deemed to have too many seriously delinquent new customers on their books, the government plans to pull the plug -- cutting off their rights to receive federal mortgage insurance to back additional home loans.

Here's what will happen:

Before the end of this month, the Department of Housing and Urban Development (HUD) plans to begin a crackdown on lenders who have excessive delinquency rates on home loans. The initiative will be targeted solely at the 7,000 mortgage lenders who provide loans to the 1 million homebuyers per year who use Federal Housing Administration (FHA) insured financing.

The first 24 months of a mortgage -- especially for a first-time buyer -- are often the toughest for the consumer, and the most revealing about the quality of the lender's underwriting and credit evaluation procedures. If loan officers allow buyers to overextend themselves financially, or close their eyes to inflated appraisals, dubious income statements, poor credit reports or bad property inspections, consumers can quickly end up in hot water.

They may "own" their home with little or no equity, but be unable to handle the monthly costs of the mortgage, plus the expenses of furnishing and fixing up the property. Very shortly, they end up in foreclosure or bankruptcy proceedings.

The theory behind the crackdown is that high rates of early home mortgage delinquencies can be as much the fault of irresponsible lending practices as they are the fault of borrowers. Lenders who hand out money to people who aren't likely to be able to pay it back on time are as much at fault in foreclosures as their hapless borrowers. And lenders who do so repeatedly need to be put out of business.

FHA has special reasons for concern about high early delinquency rates. The agency provides insurance to lenders that covers 100 percent of the costs of borrower defaults and foreclosures. In fiscal 1998 alone, it paid out more than $6 billion in mortgage insurance claims on 76,000 homes, an average of nearly $80,000 per mortgage. The FHA also has concerns about the human costs of foreclosures.

HUD Secretary Andrew M. Cuomo, who directed the FHA to begin the new program, says that "we're not just in the business of helping families buy homes. We're in the business of helping families keep homes."

Cuomo's crackdown is expected to focus on two types of lenders: Those with extremely high early default and foreclosure rates -- three times the average for lenders in their geographic area -- will be terminated from insuring loans with FHA immediately; and a larger group of lenders who have early default rates that are 1.5 times above the average for their area.

Companies in the second category will be placed on a "credit watch" status, and monitored intensively to determine the causes of their borrower problems. The program will make heavy use of electronic file reviews of loan portfolios and on-site inspections, to be conducted every three months.

Lenders found to be violating FHA rules on accepting shoddy appraisals, or participating in underwriting frauds, will be subject to fines and possible criminal prosecution.

FHA Commissioner William C. Apgar, who will run the new program, estimated that 20 to 30 companies will be barred from doing business with FHA after the first three-month monitoring period. Dozens of others are likely to be placed on "credit watch."

So what does all this tough talk from FHA and Cuomo really mean for homebuyers? For some loan applicants with marginal incomes and high debt loads, the lender crackdown could mean that it will be tougher to get a loan.

But the program could also lift the standards of FHA lending across the board, making lenders more concerned that appraisals are accurate and houses are safe.

Kenneth R. Harney is a syndicated columnist. Send letters care of the Washington Post Writers Group, 1150 15th St. N.W., Washington, D.C. 20071.

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