HUD Pushes Expansion Of Home Loan Program
By Judith Havemann
When President Clinton was accepting plaudits for forwarding a balanced budget to Congress two weeks ago, housing activists were protesting at federal buildings around the country about an obscure provision in the budget appendix.
That proposal, a Housing and Urban Development Department plan to extend low-down-payment loans to record numbers of Americans, appears poised to touch off major warfare among Washington's heavyweight housing lobbyists.
While there has been little interest on Capitol Hill when similar proposals were floated in the past, observers say they believe that HUD Secretary Andrew M. Cuomo's vigorous promotion of the plan this year may change its fortunes.
Joining HUD in pushing the loan program changes are officials of what observers call housing's "holy trinity": the Mortgage Bankers Association of America, the National Association of Realtors and the National Association of Home Builders. They kicked off a public relations campaign yesterday, releasing the results of a nationwide telephone poll on consumer reaction to the proposal, which they said showed that most Americans favored their position.
Lined up against them is a group of strange bedfellows: the Mortgage Insurance Companies of America, community bankers, neighborhood activists, Fannie Mae and the conservative Heritage Foundation.
In the 1999 budget plan, HUD proposes offering home buyers popular Federal Housing Administration (FHA) loans on more expensive homes than had previously been allowed. The amount that can be borrowed would be raised from as low as $86,317 in some areas $170,363 in the Washington area to $227,150 across the country. This would mean that qualified buyers with incomes as high as $80,000 might now be able to qualify for an FHA loan, although HUD says it is aiming primarily at families making $40,000 to $50,000 a year.
The loans require lower down payments than many conventional mortgages. They can cover closing costs, allow more flexibility in assessing credit ratings, and permit home buyers to use gifts from family members and others to make down payments.
HUD says that the new higher limits could help up to 3 million more Americans over five years become homeowners. And by broadening HUD's loan portfolio, the overall risk to the government would be reduced.
But the opponents argue that higher-income home buyers are already well served by the industry. And those who aren't able to get a conventional mortgage may not be a good credit risk for the government.
Significantly, according to Suzanne Hutchinson, vice president of the Mortgage Insurance Companies of America, the proposal pushes the government into unfair competition with the private sector, taking away business from mortgage insurance companies.
The insurance companies' allies in the fight for different reasons include the Heritage Foundation, which opposes it because it cuts into the role of the private sector, and the National People's Action, a neighborhood activist group, which is against it until the department does a better job of policing the loans it already guarantees. Fannie Mae, the giant mortgage finance company that energetically protects its interests, says HUD should stick to its core mission and not take on new business that incidently might take business away from Fannie Mae.
The FHA, which was set up more than a half-century ago during the Depression, has been a driving force for home investment across the nation, credited with creating new generations of homeowners, and sometimes criticized for helping empty the cities by facilitating the move to the suburbs.
The FHA does not issue mortgages itself. Rather, it insures home mortgages issued by banks and mortgage companies, which risk little of their own money in issuing loans backed by the taxpayers.
Today, with many lenders in the field, FHA accounts for only 10 percent of the home mortgage volume, serving some of the poorest and least creditworthy customers. In 1997, the number of failed FHA mortgages rose sharply, by about 17 percent. Many of the losses occurred in California, where loans insured during the economic downturn are now facing foreclosure, according to HUD.
HUD says it has fixed the California problem but that FHA loans will always have higher losses than private loans because FHA exists to help people who are not well served by the private sector. One of the reasons to expand the loan limit, according to HUD officials, is to increase the volume so that the risk will be less to the government.
The department's arguments make little sense to Gale Cincotta, the longtime Chicago activist leading a crusade against raising the loan limits. "HUD wants to cover up the problem by giving out more loans. We think they need to fix the problem," Cincotta said.
"We want to make sure that HUD doesn't issue loans that people can't afford. When people lose their property, the buildings are empty and taken over by drug dealers," she said. "Whole neighborhoods have been ruined by HUD."
By contrast, the mortgage bankers, who by law take in almost twice as much money for servicing an FHA loan as a conventional loan, see it as a matter of outreach. They point out that FHA is the program most commonly used by first-time African American and Hispanic home buyers.
"To raise the limit simply makes FHA more available to more home buyers in more markets," said Marc Smith, president of the Mortgage Bankers Association.
HUD officials say that conventional mortgages for low-income or minority home buyers in some areas are almost impossible to find. Almost 60,000 would-be home buyers seeking homes in the new higher loan range were rejected for mortgages last year, according to HUD.
"FHA helps people not served by the private market, particularly minorities, women and city dwellers," said Cuomo. "The proposal is a win-win situation because it will help more Americans get into homes and the taxpayers make money."
© Copyright 1998 The Washington Post Company