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Tom Kelly
Tom Kelly
The Real Estate Adviser

May 25, 2000

HUD forced to police its own programs

By TOM KELLY
The Real Estate Advisor

I genuinely believe HUD’s heart is in the right place. The problem is, given its makeup and intent, the Department of Housing and Urban Development is often easy to undermine. In fact, it is now forced to correct, scold and punish the very people it has empowered.

Some members of Congress hear about home-and-loan abuses so often that they would like to see the Federal Housing Administration agency taken out of HUD and put into the private sector.

I thought about the number of times HUD has been forced to revisit some of the lenient programs it originates when Secretary Andrew Cuomo recently announced a Fraud Protection Plan that he says will both protect consumers from 'predatory' lenders and offset consumer losses from low-down payment loans.

Just over two years ago, at the National Association of Realtors annual convention in New Orleans, Cuomo announced special funding to help new immigrants and minorities better understand the home-ownership process.

Cuomo said there was a need for a program that takes a softer approach than that of the Fair Housing Act.

Secretary Cuomo said, "You have a stick. How about a carrot?"

Perhaps there have simply been too many carrots - or then have been distributed into the wrong hands, including lenders, appraisers and insurers. HUD’s task force identified some cases in which FHA borrowers were charged unreasonably high fees and closing costs. The agency said it planned to cap the number of points and fees charged FHA borrowers, and scrutinize lenders who have been known to only be after FHA insurance money.

In a capsule, some lenders have taken advantage of first-time buyers because those buyers do not fully understand what is being offered, especially the costs to borrow, before they sign on the dotted line. In other cases, sophisticated scams have been set up to minimize lender exposure while taking advantage of guaranteed insurance cash.

First-time homebuyers - many of whom will be relatively new to the United States, are pushing the housing ladder. The Census Bureau reported more than 800,000 immigrants entered the U.S. in 1998, about one-third of the country's population growth last year. Analysts believe that the immigrants hold the keys to the residential building industry but also to critical segments of the economy. That's because many newcomers pay cash, reducing the concerns of escalating consumer debt, except in big-ticket purchases like homes.

For years, FHA loans were perceived as being heavily wrapped in red tape.

Some of that burden was unraveled a decade ago when the department gave "direct endorsement" authorization to private lenders so they could process loans without waiting for FHA approval. Other minor shortcuts have been made, but FHA loans - like conventional loans - have needed increasingly fatter files due to a variety of new disclosure forms and regulations.

FHA insures loans so that if the borrower defaults, the lender is guaranteed to receive the outstanding mortgage amount. For the past 60 years, an FHA loan has been the primary low down payment option for homebuyers. The popularity of FHA loans has dwindled in the past decade, as the private market has grown more sophisticated and efficient at creating and providing mortgage money. FHA insured 1.3 million homes last year.

And, while trying to improve those numbers with home-buying incentives and streamlined programs, the service systems have derailed the big picture. Some appraisers have over inflated values, putting lenders in the driver’s seat when the borrower defaults. Under the new plan, once FHA identifies a mortgage based on a fraudulent appraisal, FHA will move to force the lender to write the mortgage down to a level consistent with true market value. If a lender refuses, FHA will intervene directly, cancel the insurance, take possession of the deed, and resell the property with FHA insurance to the family for the fair market price.

Another back-door move by lenders and investors of the FHA insurance system is the practice called 'flipping.' Flipping occurs when an investor purchases a property at a relatively low price, then re-sells or 'flips' it for a much higher, inflated price, even though few improvements have been made to the property. Where flipping is suspected, FHA insurance will be denied. FHA said it would also monitor future applications for FHA insurance to prevent former FHA foreclosed properties from being flipped and returned to the portfolio at an inflated price.

The good news is more consumers are now able to buy a home. More than two out of every three (67.1 percent) of United States households own their home, according to the first-quarter statistics for 2000 just released by the U.S. Census Bureau. However, there were wide disparities found in an ethnic homeownership breakdown, with 45.7 percent of Hispanics owning their homes as opposed to 73.4 percent of white non-Hispanics homeowners.

HUD will try to find a way to narrow that gap. Let’s hope there are no premeditated efforts to sidetrack the next creative plan.



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