Community activists have labeled a Clinton Administration proposal to raise the ceiling on federal-insured mortgages a smokescreen to hide a rising tide of Federal Housing Administration foreclosures.
The President has proposed increasing the FHA loan limit to $227,$150 in an effort to reach potential home buyers who, despite higher incomes, cannot qualify for a loan without government backing.
FHA-insured loans are considered the last resort for buyers with credit problems or other difficulties. Would-be buyers who cannot qualify for an FHA loan must either obtain far more expensive financing or give up their ownership aspirations until they can solve their problems.
But Gale Cincotta, the outspoken chair of National People’s Action, a nationwide coalition of more than 300 grassroots neighborhood groups, told Congress “it is absurd” to expand a program that foreclosed on more than 71,500 FHA borrowers in the 1997 fiscal year.
In the last decade, according to Department of Housing and Urban Development figures, nearly 800,000 families have been forced to “hit the bricks,” Cincotta told a House subcommittee hearing on Sec. Andrew Cuomo’s plan to dispose of HUD’s stock of foreclosed properties, which grows by about 5,000 a month.
The move to raise the limit is an “attempt to cover the problem” so lawmakers won’t complain, she said.
Cincotta’s testimony and that of other activists caught the ear of several congressmen, including Rep. Jesse Jackson Jr. (D.-Ill.), who said foreclosures are “having a devastating impact” in his Chicago district.
“People who lose their homes to foreclosure have nothing to show for their effort but a bad credit record for seven years,” he said.
Neighborhoods where foreclosed properties are located also suffer, other activists told the panel.
Carl Edwards, a community leader in his east side Indianapolis neighborhood, said there are 16 abandoned homes within two blocks of his house.
One foreclosure “starts a domino effect” that leads to crime and drugs, said Edwards. “Abandoned houses are a magnet for crime that leads to lower property values, a lower quality of life and eventually absentee landlords and high rents.”
HUD, which has been chastised repeatedly for the way it disposes of foreclosed properties, wants to speed their sale by selling blocks of its inventory at a discount to private specialists. That way, HUD believes foreclosed properties will be vacant for shorter periods, thereby preventing neighborhood decline.
But an expert in loss management told the subcommittee on housing and community opportunity that just the opposite is true, that properties sold in bulk usually are resold at a discount, thereby depressing neighborhood real estate values.
And Cincotta said HUD would do better to attack the problem of why there are so many foreclosures. It is ironic, she testified, that a federally funded program is working against the very people it was intended to help.
Michael Quinn, who is senior vice president for credit loss management for Federal National Mortgage Association (Fannie Mae), the nation’s largest supplier of funds for home loans, said bulk buyers base their bids on the realization that to sell property quickly, listing prices need to be below market value.
“The result is that the seller does not obtain the maximum proceeds and real estate values in the neighborhood are negatively affected,” he said.
Cincotta, whose Chicago-based group has been fighting fraud, abuse and neglect in the FHA program for nearly a quarter-century, called HUD’s property disposition plan “another case of HUD mopping up a problem rather than stopping the leak that caused it in the first place.”
She called on Congress to mandate an independent inspection of all houses backed by FHA-insured loans, fund a one-year warranty program for existing homes, and institute a mandatory and comprehensive assistance program as a safety net for owners experiencing unavoidable but temporary difficulty making their monthly payments.
Given the vulnerability of most first-time buyers, Rep. Luis Gutierrez (D.-Ill.), said he, too, favors requiring an inspection.
“Sometimes the government has to do things to protect people,” the Chicago legislator said.
Edwards, the Indianapolis community leader, said he wishes he had been required to have his house given the once-over by an independent third party when he was a naive, inexperienced first-time buyer in 1991.
“I was really stupid,” he said. “I used the seller’s agent, who arranged for an inspection. But I’m still not clear whether it was an appraisal or an inspection.”
Within a year, Edwards had to fix roof leaks in three rooms, install new plumbing and replace the furnace, air conditioner and water heater. And he had to make a choice: Pay the mortgage or pay for heat. He choose the latter, and he eventually lost the house.
Had the place been properly inspected, he might not have gone ahead with the sale, he testified. And had there been a program to help him stay afloat, he might have been able to keep his house.
Edwards said his is not an anecdotal case. Rather, he said, many buyers are totally dumbfounded by the buying process. “I know better now, but most people don’t.”
Now an owner again, having purchased his parents house, Edwards has a burned-out HUD house directly behind his. And a neighborhood that used to be a bustling community is now a drug infested, crime-ridden place to live.
“I have seen this kind of trend time and time again,” he told the subcommittee. “In a neighborhood like ours, a house will be abandoned, then another and so on, and as a result, property values will fall and more people leave.
“Before you know it, we have an area that is full of absentee landlords, where rents are high and property values are low. All this from a program that is supposed to help home owners, not make them homeless.”
