The District of Columbia will begin insuring mortgage loans for high-risk, low-income home buyers in the fall under a new $1.8 million mortgage insurance program city housing officials have funded for the first time this year.
Carrol Madison, acting executive director of the D.C. Housing Finance Agency, said the Mortgage Loan Guarantee Fund could begin operating as early as Oct. 1 if her agency can finish writing the rules for the program and submit them to the D.C. Council for approval by then.
The council recently approved $1.875 million for the program, $875,000 as part of the District's 1988 budget and another $1 million that the city expects to get in federal grants. Although the Housing Finance Agency has had the authority to run such an insurance program since the agency's creation in 1981, it has not done so because there was relatively little need for it, said Council member Charlene Drew Jarvis (D-Ward 4) who heads the council's housing and economic development committee.
But "circumstances have changed," Jarvis said. She said that recently an increasing number of low- and middle-income buyers who qualified for loans through one of the city's special mortgage programs have been unable to get private mortgage insurance because of their income or past credit history. And without mortgage insurance, which protects a lender against loan foreclosure losses, "lenders won't write a mortgage," Jarvis said.
"Over the past year, mortgage insurance underwriting criteria has tightened. So if a person is late on one credit card payment, he may not get mortgage insurance," Jarvis said. She estimated that a quarter of all loan applicants in the city last year were denied a mortgage because they couldn't get private mortgage insurance.
Madison said her agency has no record of the total number of people who qualified for mortgages under the Housing Finance Agency program but got rejected because prospective buyers apply directly to lenders for the mortgages.
Under the new insurance fund program, the city would underwrite loans for low-income buyers who can't get private mortgage insurance. The Housing Finance Agency, which will administer the program, would apply less stringent underwriting requirements than those that commercial insurers require, Madison said.
Madison said she doesn't know yet what those requirements will be because her agency has just started drafting guidelines. She did say, however, that she doubts that the "requirements would be as high as those required for mortgage loans made through the city Housing Finance Agency."
Currently, home buyers applying under the Housing Finance Agency's Single-Family Home Mortgage program must earn no more than $37,691 a year for one person, $49,840 for two persons, or $53,400 for a four-person household to qualify for a mortgage of up to $115,000. There is no minimum income required for the program.
Commercial mortgage underwriters typically require that a buyer's mortgage payments do not exceed 28 percent of the total household income and that total fixed monthly debts not exceed 36 percent of gross family earnings. City legislation introduced by Jarvis also would require low-income buyers to pay an as yet unspecified fee for the city's mortgage insurance to help defray the program's administrative expenses and any losses from foreclosures.
Katharine Schultz, associate director of Manna Inc., a nonprofit D.C. developer that renovates and sells houses to low-income buyers, said that it is often difficult for their applicants to meet conventional mortgage insurer requirements. She said that many times a lower-income family's housing costs will eat up more of their income than private mortgage insurers allow, but that doesn't mean they won't be able to make a mortgage payment.
"It's true that lower-income people live on less money, but they are more careful where it goes," she said.
But Tom Anderson, corporate counsel for Verex Corp., a conventional mortgage underwriter, said the city could be opening itself up to risks.
"If people are having trouble getting mortgage insurance, it means that they can't meet the payments or the property may not be worth what the property is selling for," he said.
But Jarvis said she doubted the city will be at much risk. "If a lender can sell a house for the value of a mortgage, then the city won't pay. But if a lender loses money, the city would pay the difference," Jarvis said. "With the high value of city property, I don't foresee that happening," she said.