Looming Deficit Impedes Federal Housing Agency
Housing officials say the agency will face a deficit for the first time in its 74-year history, starting in the fiscal year that begins in October. And they blame a rapidly growing and increasingly troubled sector of the F.H.A.’s mortgage portfolio, known as the seller-financed down payment loan program, which has suffered from high delinquency and foreclosure rates in recent years... In 2000, such mortgages made up less than 2 percent of F.H.A.-insured loans, officials say. By 2007, statistics show, they accounted for 35 percent of F.H.A. loans...“These types of loans have pushed F.H.A. to the brink of insolvency,”  Alphonso R. Jackson, the housing secretary, told senators recently. “They are costing hard-working Americans their homes.” Mr. Jackson announced last week that he would resign his post as of April 18...But HUD is not the only agency to raise concerns about seller down payment loans. In 2005, the Government Accountability Office raised concerns that were echoed by the Internal Revenue Service a year later.

Looming Deficit Impedes Federal Housing Agency
By RACHEL L. SWARNS
Published: April 9, 2008

WASHINGTON — The Bush administration and Democratic leaders in Congress are counting on the Federal Housing Administration to rescue hundreds of thousands of homeowners from foreclosure by helping them refinance from risky subprime loans to stable government-backed mortgages.

           

             Win McNamee/Getty Images
             Alphonso Jackson, the housing 
             secretary, has told Congress that 
             the F.H.A. has been pushed to
             the brink of insolvency.

But the F.H.A., the government agency that insures home loans for many first-time, minority and lower-income buyers, is grappling with financial woes of its own.

Housing officials say the agency will face a deficit for the first time in its 74-year history, starting in the fiscal year that begins in October. And they blame a rapidly growing and increasingly troubled sector of the F.H.A.’s mortgage portfolio, known as the seller-financed down payment loan program, which has suffered from high delinquency and foreclosure rates in recent years.

Under the program, a home seller arranges to cover the buyer’s down payment — using financial help from a nonprofit company — but typically adds that sum or more to the total cost of the house. The arrangement has been particularly attractive to financially struggling buyers and to owners in depressed housing markets, according to Congressional officials.

In 2000, such mortgages made up less than 2 percent of F.H.A.-insured loans, officials say. By 2007, statistics show, they accounted for 35 percent of F.H.A. loans.

Housing officials say these mortgages have foreclosure rates two to three times those of others, leaving the agency reeling from the losses.

If the program continues without any changes, Congressional officials say, the F.H.A. would face a $1.4 billion shortfall in fiscal 2009. This would mean that Congress — and American taxpayers — would have to subsidize the F.H.A. for the first time.

Officials hope to help plug F.H.A.’s financial hole by charging homeowners higher premiums — making such loans more expensive — and by championing legislation that would ban seller down payment loans altogether.

In recent weeks, officials at the F.H.A.’s parent agency, the Department of Housing and Urban Development, have been ringing the alarm bells on Capitol Hill. On Wednesday, the head of the F.H.A., in testimony before the House Financial Services Committee, is expected to urge Congress to take swift action to curb such loans.

“These types of loans have pushed F.H.A. to the brink of insolvency,” Alphonso R. Jackson, the housing secretary, told senators recently. “They are costing hard-working Americans their homes.” Mr. Jackson announced last week that he would resign his post as of April 18.

The looming financial difficulties have not prevented the Bush administration from expanding the F.H.A.’s role to help ease the nation’s foreclosure crisis. Since September, more than 150,000 homeowners have refinanced through F.H.A. and officials hope that the number will increase to 400,000 by the end of the year. Democrats hope that new legislation will enable the F.H.A. to help many more homeowners.

Under a variety of proposals circulating on and off Capitol Hill, those whose homes are now worth less than they owe apply for more affordable loans insured by the federal government. Their current lenders would have to voluntarily reduce the principal balances of loans, taking a loss, and borrowers would have to meet strict requirements showing the ability to pay the new loan. They would also pay insurance fees to protect the government from future defaults.

But because the Bush administration has failed so far in its efforts to ban the practice of seller-financed down payment loans, lawmakers, analysts and housing officials fear that the prevalence of these seller down payment loans may mushroom.

With the subprime market collapsed and mortgage companies tightening lending criteria, seller down payment loans may become increasingly appealing — both to sellers in slumping housing markets and to lower-income home buyers unable to access conventional mortgages.

“It’s a toxic brew,” said Howard Glaser, a mortgage industry consultant who served as HUD general counsel during the Clinton administration. “All the ingredients are there for the problem to escalate.”

Proponents of the loans, who include some powerful members of Congress, counter that they provide much-needed assistance to low-income and minority families who would otherwise be unable to buy homes.

Representative Barney Frank, the Massachusetts Democrat who is chairman the House Financial Services Committee, has said he would like to reform the program without killing it. Among other things, House legislation would allow F.H.A. to charge higher premiums on homeowners who use such loans to defray some of the program’s costs, an approach advocated by H.U.D. officials.

Given such support for the loans, it is unclear whether the Bush administration will succeed in its efforts to ban them. Senate housing legislation currently under consideration includes such a prohibition, but a comparable House bill does not.

Meanwhile, some of the nonprofit companies that provide down payment assistance have sued H.U.D. and the courts have so far blocked rules that would prohibit seller down payment loans, citing problems in the rule-making process of the agency, among other things.

Scott C Syphax, president of the Nehemiah Corporation of America, which provides such loans, praised the most recent federal court decision in the Eastern District of California. “The decision preserves access and supports the use of sensible and reasonable approaches to homeownership for millions of working-class families,” he said in a statement.

Stephen O’Halloran, a H.U.D. spokesman, said the department was still weighing its options. “We are currently examining alternative steps to take in light of the court’s decision,” he said.

Over the past seven years, seller down payment loans have surged in popularity at a time when the F.H.A. share of the mortgage market was plunging. With the widespread availability of subprime mortgages, home buyers were abandoning F.H.A.’s conventional loans in droves.

From 2002 to 2006, the number of single-family loans insured by the F.H.A. fell from about 1.3 million to 313,998, according to government statistics.

The nonprofit companies say they actually helped make the F.H.A. competitive by providing down payment assistance, attracting home buyers to the F.H.A. who might have gone elsewhere.

“All we do is give them the down payment money to get them over that obstacle so they can start enjoying the benefits of homeownership,” said Ann Ashburn, president of AmeriDream of Gaithersburg, Md.

Ms. Ashburn said she and other executives had raised concerns about the validity of HUD’s statistics.

But HUD is not the only agency to raise concerns about seller down payment loans. In 2005, the Government Accountability Office raised concerns that were echoed by the Internal Revenue Service a year later.

“Families have gotten in trouble and the system has gotten in trouble,” said Senator Kit Bond, Republican of Missouri, who is a critic of the loans. “It looks like Congress is going to have to take some action. I hope this is a wake-up call.”
http://www.nytimes.com/2008/04/09/business/09fha.html