Baltimore housing officials are working feverishly to revamp and restart by spring the city's most popular homebuying-assistance program, which was halted this month by mortgage giant Fannie Mae because nearly 40 percent of the loans made in the program are in severe delinquency,
The city's Settlement Expense Loan Program - better known as SELP - offers city homebuyers a 10-year loan of up to $5,000 at 9.25 percent to help cover a down payment and closing costs. The loan functions as if it were a second mortgage.
Since it could be used anywhere in the city and had few borrower requirements, the SELP program was one of the most useful tools employed by real estate agents and lenders in helping cash-strapped buyers purchase a city home. However, the program, which began in 1998, was stopped Jan. 4 after the city exhausted its final $2 million draw on an $18 million line of credit with Fannie Mae.
The federally chartered company, which supplies funds to lenders by purchasing mortgages, has been unwilling to negotiate a new line of credit until the city retools the SELP program. According to the city officials, 36.6 percent of the 3,907 loans the program had on its books as of last week are delinquent by 90 days or more. That figure is down from a 45 percent delinquency rate in September, according to Tom Jaudan, director of the city's Homeownership Institute.
"We are taking a hard look with the delinquency rate that the city is experiencing with these loans," said Frank Coakley, director of the Fannie Mae Partnership Office in Baltimore. "To renew, we must get a handle on this thing."
In addition, the city reported that the program has had a 4 percent default rate, and it had to cover the bad loans and pay Fannie Mae $172,000 from its budgeted reserves for the SELP program.
The city said it made 1,452 loans between Jan. 1 and Dec. 1 last year, representing $5.7 million. Last year, 7,826 homes were sold in the city, according to a preliminary count by the Metropolitan Regional Information Systems Inc., the multiple listing database used by real estate agents. That means nearly one of every five transactions was dependent on a SELP loan.
And with the program on hiatus, hundreds of potential city homebuyers in coming months may not be able to put together the financial means to get into a home.
"Among our members, SELP is a really important part of the services they offer," said Joseph T. Landers, executive vice president of the Greater Baltimore Board of Realtors. "The total number of [annual] transactions in the city ranges from 6,500 to 7,500 - that's a big percentage of the total volume in the city. We're hoping that it will get back on track."
JoAnn Copes, development director for the Department of Housing and Community Development, said Fannie Mae began to express concern about problems in the program last summer as the city was nearing the end of its credit line.
"Three years into it is when we started to see that it was running a higher default rate than what we thought was acceptable," Copes said.
"We do want to run a responsible program," she added. "We all agree that the underwriting standards for the program need to be tightened up, which will mean fewer people will qualify for this loan, but we'll also have fewer delinquencies and defaults. And what we are trying to determine is what's the appropriate level."
At the heart of the matter seems to be how the system had been constructed when it was introduced. Lenders refused to be responsible for the collection and servicing of the SELP loan, therefore it was up to the city to hire its own servicer to collect the SELP payment.
Oddly, it seemed that borrowers paid the primary mortgage on their home, but for whatever reason decided not to do likewise on the SELP payment, which at most would cost $64 a month. According to Copes, an analysis of the delinquent loans showed that borrowers with good credit ratings were just as guilty of not paying as those with poor credit.
Copes, as well as Landers of the GBBR, seemed to suggest that the delinquent borrowers may have judged that the city wouldn't go through costly foreclosure proceedings just to get at a couple of thousand dollars.
"I guess people are willing to accept the risk ... it's only a $5,000 loan," Landers said, "and the cost for the city and the legal process for foreclosing on a $5,000 loan is onerous in itself."
As city officials began to realize in August that delinquencies were mounting and Fannie Mae officials were getting uneasy, they began to take steps to restrict the program. They mandated that applicants take homebuying counseling, required the buyers to put up $1,000 of their own money (none had been required before), and made the qualifying income-to-debt ratios stricter. They also had the company servicing the loans become more aggressive in collecting payments.
But Fannie Mae expects more.