Housing Secretary Jack Kemp on Wednesday killed a Reagan administration program under which private lenders committed the government to insuring mortgages.
Federal officials and independent auditors said the program has cost the government $1 billion in losses since it began in 1983.
Under the program, private lenders supervised most of the underwriting of loans, the credit checks and appraisals for multifamily housing projects and assumed about 20 percent of the risk of insuring the mortgage. The government assumed responsibility for the remaining 80 percent.
”The co-insurance method is structurally flawed and fundamentally unsound as well as administratively unfixable,” Kemp said. ”In comparing the losses resulting from co-insurance to the housing provided, it is clear that co-insurance has been a bad deal for the American taxpayer.”
The program was one of the Reagan administration`s major initiatives in public-private partnership.
It was established by Samuel Pierce Jr., President Ronald Reagan`s secretary of housing and urban development, as a way of allowing the private sector to perform functions previously performed by the government in the hope of speeding loan applications and reducing inefficiency.
But congressional investigators found some lenders had vastly overvalued property that was being mortgaged.
In the course of arranging these inflated mortgages, the investigators said, a lender would receive a large servicing fee based on the size of the mortgage.
Later, when the owner or developer defaulted, the lender was able to pay its 20 percent share of insurance costs and still come away with a profit, leaving the government responsible for the rest of the loss.
Investigators also have attributed some of the losses to economic downturns, especially in the Southwest, that caused a rising number of defaults. And they reported finding evidence that the Department of Housing and Urban Development did not properly oversee the work of the private lenders.
Auditors from Price Waterhouse accounding firm, hired by the General Accounting Office, an investigative arm of Congress, concluded last fall that the program had amassed a $1 billion loss.
Kemp said the government would take over the tasks previously given to private lenders, including credit checks and appraisals, and would fully guarantee the loans.
Because some projects now are being processed by HUD, Kemp said the program would have to be phased out gradually. Officials said this interim period would probably take several months, possibly longer.
In the meantime, Kemp ordered that private lenders seeking to approve loans under the program first submit all documentation to HUD for approval.
In his report last month to President Bush and Congress, Kemp identified the program as the department`s No. 1 ”material weakness.”
The housing secretary said the agency would now receive 100 percent of the mortgage-insurance premiums.
But he said the private lenders still would be doing some of the screening for a fee.
As one of the worst examples of the program, Kemp cited the case of Colonial House, an apartment project in Houston that was insured for $47.2 million and defaulted because of high vacancy rates.
HUD was forced to take over the project and recovered only $8.9 million when it was auctioned last year.
