Bad VA Home Loans May Top $2.5 Billion : Housing: A study for Congress predicts an increase in foreclosures on veterans’ mortgages. It says more funds will be needed to cover the new defaults.

The Department of Veterans Affairs will need $2.5 billion in congressional appropriations over the next few years just to cover the bad loans in its housing programs, according to a new government prediction.

Congress already has spent $2.3 billion to cover losses during the four years ending in 1989, the General Accounting Office said in its report. But housing downturns since the early 1980s, particularly in oil-dependent states of the West and Southwest, have led to widespread foreclosures on veterans’ homes that will necessitate the new funding.

The GAO report makes clear that the worst may not be over.

Losses predicted by the agency will occur as a portion of the 3.9 million home loans now being backed by the government go into default.

The agency based its estimate of how many loans would go bad on the types of mortgages it has insured, its experience with defaults and economic conditions, according to Dennis Duquette, the GAO’s director of civil audits.

The GAO did not estimate the exact number of years over which the losses will be spread, but most veterans who default on their mortgages do so in the second through fifth years after they buy their homes, Duquette said.

Most veterans pay some fees when they get a government-guaranteed loan under the program, which was created by Congress in 1944 to help returning World War II veterans make a new start in civilian life.

Although the program was not designed to break even or make a profit, it was not expected to be a massive money loser.

Under recent legislative changes, a home-buying veteran will pay a fee ranging from nothing to 1.875% of the loan amount to secure a VA loan, depending on the size of the down payment. This is a change from the 1% fee once charged to all veterans.

The fee paid by the veterans, along with a 0.5% fee from the government, goes into the Guarantee and Indemnity Fund, also created by the law to help cover losses from loans issued after last Jan. 1.

Additional reforms are being proposed by some members of Congress, including Sen. Barbara A. Mikulski (D-Md.), chairwoman of the VA, housing and urban development subcommittee of the Senate Appropriations Committee.

An aide said last week that Mikulski believes the VA needs more employees to oversee the loan operations.

At the end of the 1989 fiscal year, the loans being backed by the VA had a total face value of $152 billion, with the government guaranteeing $60 billion of that amount, according to the GAO.

The VA guarantees mortgages for up to 50% of a loan of $45,000 or less. On loans of more than $45,000, the department guarantees 40% of the total or $36,000, whichever is higher.

D. Mark Catlett, the VA’s deputy assistant secretary for budget, said the department “agrees with (GAO’s) estimates (of future loan losses) in general.”

The loan-guarantee program has never been totally self-sufficient, and with the housing recession in the early 1980s, the problem got worse, Catlett said.

In addition to the loan guarantees, which are the largest VA housing program, the department makes direct loans in rural areas where veterans are unable to get loans from private lenders.

The department also makes direct loans to buyers of houses that the VA has taken over through foreclosure.

The number of VA foreclosures fell last year for the first time since 1980. The department said about 43,000 veterans lost their homes, roughly 6,000 fewer than in 1988.

But with housing markets turning down in many parts of the nation this year, it seems that “1989 turned out to be an aberration,” Duquette said.