High Default Rates Prompt HUD Inquiry
Federal housing officials today are expected to call for a 90-day freeze on foreclosure proceedings against homeowners behind on payments of government-backed loans after finding an unusually high rate of mortgage defaults among the elderly, minorities and immigrants who might have been victims of unscrupulous lending practices.
In addition, the Department of Housing and Urban Development will send a team of 60 staffers to the Los Angeles area over the next couple of months to ensure that lenders who make government-insured loans are following federal guidelines.
The problem of mortgage defaults was found most frequently in 21 ZIP codes generally tracking the Harbor Freeway, from the Hollywood Freeway south to the Gardena Freeway, as well as two areas in Long Beach. In that “hot zone,” HUD officials found homeowners defaulting on loans or filing claims at a rate ranging from 7% to more than 15%, contrasted with only 3.6% for the Los Angeles area overall.
HUD will attempt to protect new home buyers applying for mortgages insured by the Federal Housing Administration and to prevent homeowners from losing their property through foreclosure.
“This is going to save thousands of homeowners from fraudulent foreclosures,” said HUD Secretary Andrew Cuomo, who will outline the foreclosure moratorium and other efforts today at a HUD-sponsored forum for community and church leaders in Los Angeles.
“It will send a strong message to the perpetrators that we will not allow homeowners to be victimized by unscrupulous lenders.”
Modeled on a similar program HUD launched this year in Baltimore, the initiative attempts to root out unsavory FHA-approved lenders by curbing mortgage fees and suspending violators from making government-backed loans. The FHA encourages lenders to finance potential home-buyers who might not otherwise qualify for a home loan by providing mortgage insurance. The agency, which insured 1.3 million mortgages last year, currently insures more than 7 million loans nationwide.
After his agency found a pattern of high rates of homeowner defaults clustered in certain geographic areas, including Los Angeles, and among certain groups such as the elderly, minorities and immigrants with limited knowledge of the home-buying process, Cuomo said the figures made him suspicious that “bad” FHA-approved lenders are making high-cost loans.
Under the program to be announced today, HUD will ask lenders of FHA-backed mortgages believed to based on an inflated appraisal to restructure the loans to reflect current values. If the mortgage company declines, HUD will terminate the loan and issue the buyer another mortgage at a fair market price.
HUD will also use an online database to check a home’s previous selling price for evidence that it might have been bought at a cheaper price and put back on the market after cosmetic repairs at an inflated price. If within a 12-month period the home’s appraised value has risen 30% or more, HUD may refuse to offer mortgage insurance on the property.
And if the inflated value, which leads to higher monthly payments, caused the borrower to have late or missed payments, HUD would send a letter to agencies that should clean up the buyer’s credit rating.
“I think this program will help prevent some of the predatory lending that’s been happening,” said Joseph Wilson, one of six representatives from the Assn. of Community Organizations for Reform Now, which in July negotiated $360 million in home loans for thousands of low-income families in 10 cities, including Los Angeles, from Ameriquest Mortgage Co. of Orange.
HUD will also announce a $300,000 grant program for local nonprofit groups to provide home-buying counseling and assistance. Wilson cited counseling as an important step for helping first-time buyers avoid excessive mortgage fees or other lending practices that advocates often consider abusive. “If people had more knowledge, they could negotiate a better situation for themselves,” he said.
The sudden scrutiny of suspected predatory lending practices was sparked in part by the March bankruptcy filing of First Alliance Corp. in Irvine. The subprime mortgage lender, which did not sell FHA-backed loans, closed its doors amid numerous borrower lawsuits and government investigations into allegations that the company overcharged low-income homeowners and seniors.
Despite heightened scrutiny of those who lend to consumers with blemished credit records, so-called subprime lenders generally don’t make FHA-insured loans and would be unaffected by the program to be announced today, senior HUD officials said.
HUD already has begun taking action against some FHA-approved lenders in the region. Last week, sanctions were leveled against Allstate Mortgage Co. of Norwalk. Allstate Mortgage received HUD’s harshest penalty: immediate and permanent withdrawal of authority to make FHA-insured loans.
On Sunday, Cuomo opened the first HUD storefront office in Southern California, moving more than 100 agency employees from a Santa Ana office tower to a street-level location in the same city.
