Statement by Gail Cincotta
Before the Subcommittee on Housing and Community Opportunity
April 1, 1998
Thank you Mr. Chairman and other members of the Sub-Committee for this opportunity to testify. I speak not only as executive director of the National Training and Information Center, but as chairperson of National People's Action, a nationwide coalition of over 300 grassroots neighborhood groups working on neighborhood issues such as community reinvestment, anti-crime and -drug strategies, and reform of the Federal Housing Administration (FHA). We have been fighting abuse, fraud, and neglect of the FHA program that has destroyed too many neighborhoods and too many families' dreams of homeownership for more than 25 years.
The FHA is conservatives' poster child of a bloated government program trying to supplant private investment and the marketplace while doing a much worse job. The FHA program has a national default rate 3 to 4 times the conventional market, and in many urban neighborhoods it routinely exceeds 10 times. In addition, the FHA program is hemorrhaging money. In 1997, the FHA program paid out $5.3 billion dollars in claims, and over $47 billion in the last ten years.
At the same time, the FHA is liberals' nightmare of corporate welfare and profiteering that preys on minority and working-class people--since mortgage bankers can't lose with the FHA's 100 percent guaranteed loan program. Despite how easy it is for mortgage bankers to rip people off, Department of Housing and Urban Development (HUD), FHA's parent agency, has little or no meaningful consumer protections on the program. Even something as simple as a mandated inspection on the homes FHA insures, HUD refuses to implement.
The billions of dollars referred to above went to finance the foreclosure of hundreds of thousands of families. According to HUD's own figures, the FHA program paid off lenders for 71,599 families who were foreclosed on last year alone. If each home housed a family of four, in the last ten years HUD and the FHA have allowed the American Nightmare of foreclosure to come to over three million people.
In an economy that most people cite as the healthiest in many years, the FHA program has seen the first significant increase in foreclosures in nearly a decade. The problem is the program. Obviously, the Federal Housing Administration's Loan Guarantee Program is in desperate need of reform.
HUD's ideas of reform have been at best, pathetic and at worst, potentially destructive. The first such "reform" is a proposal to raise the FHA program's loan limits. Despite the fact that it is absurd to expand a program already in such deep crisis, raising the limits would move the FHA away from its mission of helping low and moderate income families achieve and maintain homeownership.
Recent numbers show that despite an overall raise in homeownership rates, FHA is losing market share. This is because of innovative lending agreements made through the Community Reinvestment Act and because we have begun convincing conventional lenders there is money to be made in the neighborhoods. This is good news, although I think we still have a long way to go. HUD, however, seems to disagree.
In addition to running FHA, HUD has congressionally mandated oversight responsibilities of the Government Sponsored Enterprises (GSE) of Fannie Mae and Freddie Mac, the leading market forces in the conventional market. Part of this responsibility includes setting affordable housing goals for the GSEs. HUD, the agency that now cites a lack of affordable lending as a rationale for an expanded FHA, recently set Fannie Mae and Freddie Mac's affordable housing goals lower than the levels the agencies were currently meeting.
We will continue to demand that the conventional market expand its presence in low, moderate and minority neighborhoods, as we have historically done, but expanding FHA is perhaps the worst way to build healthy neighborhoods.
Most recently HUD has advocated a second reform, in property disposition. By privatizing the function of selling off the foreclosed properties, HUD officials reason, they will be able to sell more homes faster. This is a real need since their own conservative estimates are that the list of properties HUD owns grows by at least 5,000 homes a month, but why not attack the problem of why there are so many foreclosures? It's hard to imagine anyone doing a worse job dealing with the abandoned buildings in the neighborhoods than HUD. However, this is another case of HUD mopping up a problem rather than stopping the leak that caused the problem in the first place. The proposal does nothing to address the numbers of inventoried properties, only makes it someone else's problem.
The highest-level bureaucrats at HUD ignore the evidence of victims, research by NTIC and others, and the increasing attention being paid to the FHA's government-sponsored neighborhood destruction. They point with pride to the thousands of families who get FHA mortgages every year. It's a meaningless statistic if last month's homeowners become next month's home losers because of FHA-related foreclosure.
At NTIC we have worked very hard to point out to HUD that this problem is not a statistical blip and that it is concentrated in the very place that you would expect the FHA to help most: urban neighborhoods. Congress ordered the agency to collect default data census tract by census tract in 1990. We at NTIC were the first people to use this data for anything at all. Incidentally, after we released our study, HUD staff called us--to ask if they could get a copy of their data from us.
When NTIC released a study last October (attached) that used this data to analyze lending penetration and loan defaults over a five year period, we showed that HUD has been doing a fine job of letting mortgage bankers get away with murder.
What we found was that some mortgage bankers are able to make loans that go into default at relatively low rates, while other companies had default rates as high as 40 percent in city after city. These are not just fly-by-night companies. Some of the biggest, like Chase and Norwest were implicated. Typically, these firms take advantage of the fact that they share no risk on these loans to cut corners. Corners the system allows them to cut.
For example, HUD does not require pre-purchase home inspections, nor do they make attempts to work with home buyers who encounter difficulties paying their mortgage. In many cases, FHA-financed homes are purchased after cosmetic rehab work has been done to mask serious structural defects. In others, homebuyers have received conflicting messages about work outs or been told flat out that it would be impossible to get even the slightest flexibility in their monthly payment schedule--paying a week late, or a few dollars less than the full mortgage amount for example, results in the check being returned and a default set in motion.
NTIC's position is that the limits must not be raised and that the problems at FHA can and must be fixed immediately.
These are NTIC's main proposals:
1) Mandate an Inspection on all FHA insured homes.
Congress should enact an amendment to the current National Housing Act that would mandate an inspection on all FHA insured homes. By instituting a "fee panel" model of random HUD approved inspector selection would safeguard against inspector fraud.
2) Institute a warranty program on all existing FHA homes
Sections 518(B) and (D) of an earlier version of the National Housing Act provided a safety net for families facing sub-standard housing and was extremely effective. This statute still exists in the current version and lacks only Congressional update and appropriation. An alternative method of financing would be to establish a fund, paid into by the originating lender, the real estate professional and the home seller. This fund would serve the dual purpose of assisting homeowners who are faced with unexpected and undisclosed major repairs as well as supplying some level of risk onto lender and real estate professional.
3) Institute a mandatory and comprehensive Homeowner Assistance Program to provide a safety-net for homeowners experiencing unavoidable and temporary difficulty in paying their mortgage.
Establishing a program modeled in part after the state of Pennsylvania's HEMAP (Homeowner Emergency Mortgage Assistance Program) would effectively address the problems outlined above.
Under the proposed Homeowner Assistance Program, all qualifying borrowers in default would be eligible for a loan from the FHA Insurance Fund to assist them for up to 36 months. These funds would be managed by HUD and paid directly to the existing loan servicer. This scenario would avoid an arrearage build up of interest that often accompanies the cessation of current Loss Mitigation options and would avoid the administrative pitfalls that accompanied the Assignment Program. This program would provide loan assistance out of the FHA's Mutual Mortgage Insurance (MMI) fund. The MMI fund is the fund that HUD draws from to pay out the full mortgage amount to the lender in the instance of foreclosure. Under a HEMAP-style program, immediate foreclosure would be avoided and HUD would pay only a fraction of the mortgage amount to the lender as homeowner assistance with repayment to come from the borrower. This would save HUD millions of dollars per year and keep thousands of families in their homes.
Mr. Chairman and Committee members, I would like to close by reminding you that this is far from the first time I have been before you to talk about the problems at the FHA. It's time we finally got the FHA straightened out.