CUOMO ANNOUNCES NEW CONSUMER PROTECTION MEASURE
TO REDUCE NUMBER OF FAMILIES WHO DEFAULT ON FHA MORTGAGES

WASHINGTON – Housing and Urban Development Secretary Andrew Cuomo today announced a new consumer protection measure to reduce the number of families who default on FHA-insured mortgages and to remove poorly performing lenders from the FHA program.

Under the initiative, HUD will use a new computerized system called Credit Watch to identify lenders with an above-average number of defaults and foreclosures involving mortgages insured by the FHA (Federal Housing Administration), which is part of HUD.

A default occurs when a homeowner fails to make mortgage payments on time. If the homeowner continues to miss payments for months, the lender takes possession of the home with the defaulted mortgage in a foreclosure. When a mortgage is insured by FHA, a lender turns a foreclosed home over to FHA in return for payment of the outstanding mortgage balance. Last year, lenders foreclosed on only about 1 percent of FHA loans.

The goal of Credit Watch is to protect consumers from borrowing more than they can afford to repay, thereby reducing defaults and foreclosures. Credit Watch will do this by more closely monitoring lender performance and by cracking down on irresponsible lenders with high default and foreclosure rates.

"We’re not just in the business of helping families buy homes," Cuomo said. "We’re in the business of helping families keep homes. We don’t want the American Dream of homeownership to turn into the nightmare of foreclosure."

"The vast majority of lenders in the FHA program do an outstanding job," Cuomo said. "Credit Watch will identify lenders with problems, and will allow us to remove the worst performers – in the same way a school can expel a student who flunks out."

"Credit Watch will benefit homeowners, lenders and FHA ," Cuomo added. "It will reduce the number of families who lose their homes through foreclosure when they simply can’t afford to make their mortgage payments."

HUD will conduct a review every three months of the loan default and foreclosure rates over the previous 24 months on all mortgages issued by the approximately 7,000 lenders who originate mortgages insured by FHA. These lenders have branches throughout the nation.

Lenders with a default rate at least three times higher than average for lenders in the same area will lose their authority to originate FHA-insured mortgages. This action could significantly cut the lenders’ loan volume and earnings.

Lenders with a default rate between 1.5 and three times the average for their area will be placed on probation and receive closer scrutiny from HUD.

The Credit Watch System goes into effect immediately. Lenders are being notified of the new system via letters being sent this week by FHA Commissioner William Apgar.

Lenders terminated from participation in the FHA insurance program will be able to seek reinstatement every six months. To be reinstated, they must show they have eliminated problems that led to high loan default rates.

Lenders placed on probation will be closely monitored by HUD for signs of improvement. The probation will not be lifted unless the lenders show they have made improvements in their loan evaluations, as demonstrated by a reduction in their default rate.

Before creation of the Credit Watch System and its use of computers to conduct an automated review of a lender’s loans, HUD lender enforcement was limited to labor-intensive on-site visits to the lender. In addition, the Department did not have a method of removing a lender from participation in the FHA insurance program without taking complex and lengthy formal administrative action through the Mortgagee Review Board.

Credit Watch is part of HUD’s effort to increase homeownership. A total of 69.6 million American families owned their own homes in the first quarter of this year – more than at any time in American history. This was 7.8 million more families than when President Clinton took office in 1993. America’s homeownership stood at 66.7 percent of all households for the first quarter of this year, compared with 64 percent at the beginning of 1993.

FHA, which insured more than 1 million home mortgages in 1998, does not make mortgage loans directly. Instead, FHA insures loans made by private lenders to homebuyers. This federal insurance guarantees the lender timely payment of principal and interest, in the event the homebuyer defaults on the loan.

Because FHA mortgage insurance protects lenders from losses, it has enabled millions of Americans who would otherwise be locked out of the mortgage market and homeownership to qualify for mortgages. FHA-insured loans benefit homebuyers in these ways:

• FHA downpayments of 3 percent are lower than the minimum that many lenders require for non-FHA mortgages. High downpayments are a major roadblock to homeownership.

• FHA’s requirements for homebuyer credit ratings are more flexible than those set by many lenders for non-FHA borrowers.

• FHA permits homebuyers to use gifts from family members and non-profit groups to make their entire downpayment, while conventional loans generally require homebuyers to come up with a portion of the downpayment from their own funds.

• FHA permits a borrower to carry more debt than a private mortgage insurer typically allows.