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Better options for subprime lenders.

Returning the Federal Housing Administration (FHA) loan program to its former position as the nation's primary vehicle for assisting first-time homebuyers would reduce predatory lending, says Angelo Mozilo, chairman and chief executive officer of Countrywide Financial Corporation, Calabasas, California. Mozilo made those remarks recently while sharing the podium with FHA Commissioner Brian Montgomery at a housing symposium in Los Angeles.

Predatory lending grew as FHA abdicated its role, said Mozilo, and Montgomery agreed that borrowers who traditionally would've been candidates for FHA loans instead have turned to subprime lenders.

Today about one in four residential originations is subprime, estimates National Mortgage News, and the trade journal ranks Countrywide fourth nationally in volume. In the first half of this year, Countrywide funded $20 billion in nonprime loans, compared with $6 billion in FHA/VA (Department of Veterans Affairs) mortgages.

Reforming FHA to make it a more-attractive borrowing option has been an industry priority for years. On July 25, the U.S. House of Representatives passed the Expanding American Homeownership Act (H.R. 5121), which would reduce the FHA down-payment requirement, price mortgage insurance premiums based on borrower credit profiles and increase loan limits to the same levels as Freddie Mac's and Fannie Mae's. A separate bill has been introduced in the Senate.

Existing FHA loan limits have slashed the program's use in several states. Lenders originated 109,000 FHA loans during 2000 in California. But last year the government-insured program funded just 5,000 mortgages there.

Besides finding the paperwork and calculations tedious, mortgage brokers who want to originate FHA loans say that the Department of Housing and Urban Development's (HUD's) requirement of a yearly lender audit makes that business uneconomical to pursue. One mortgage broker at the symposium told Montgomery that his firm did only a dozen FHA loans last year, but producing audited financial reports cost the company $15,000. Montgomery replied that HUD is trying to reach a compromise with brokers on this issue.

Bridge the gap

Driving Mozilo's critique of FHA is a desire to find ways to increase homeownership for low- and moderate-income households. Although homeownership rates have increased for all Americans in recent years, a substantial gap in homeownership between white and minority families persists. Lenders need to find ways to reduce this disparity--for business reasons, if nothing else. A Freddie Mac analysis shows that Hispanic households made up just 9 percent of the U.S. total in 2000, but their share will rise to 31 percent by the end of this decade. White households will drop from 75 percent to 36 percent of the American population by 2010.

Low demand isn't a problem that's reducing minority home-ownership, as current trends show a growing market for tomorrow. Loan products also are available to meet the demand. Programs widely available today offer small down payments to borrowers. Debt ratios also can be as high as 45 percent, and income from boarders and second jobs can be used to qualify.

Funds from local mortgage revenue bonds also can be used as second mortgages to help make the down payment and provide closing costs. Typically these "silent seconds" have deferred payments, with low or zero interest rates. America's homeownership gap can be seen as showing a lack of engagement more than a shortage of resources. Freddie Mac notes that too many potential homebuyers in under-served communities don't trust financial institutions, and have misconceptions about the loan process. Often they'll believe it's necessary to have great credit, a steady job history with one employer and a 20 percent down payment to obtain a mortgage from a traditional lender.

Loan officers also find their work is tougher when sitting across from a prospective borrower with little cash and a blemished credit history. Originators are compensated by their production, and it takes longer to put together a challenging loan file than it does to gain approval for someone with an above-average credit score, savings and a good income. Many originators in this situation, while not pushing predatory loans, may be too quick to place borrowers in higher-rate subprime deals. Some could qualify for better terms with conventional or alternative-A financing.

Letting a silent second cover closing costs and the down payment would place other borrowers in a loan they can afford as long as they live in their home. But using a subprime mortgage with interest-only payments or a teaser rate instead often means the borrower will need to refinance

once that loan resets in a few years. Although it becomes a source of future business for the originator, this practice can create a difficult financial treadmill for the homeowner.

Time and commitment are required to learn about mortgages designed to help underserved borrowers. Managers must encourage loan officers to choose those programs, and also find ways to market them in their communities. Holding first-time homebuyer seminars in a restaurant is a technique used to boost attendance by some lenders in Los Angeles. Local families then can learn about purchase-assistance programs offered by the city for first-time homebuyers. Lenders need to become more visible and proficient at assisting struggling buyers.

Howard Schneider is a freelance writer based in Ojai, California. He can be reached at
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Title Annotation:Broker Business
Author:Schneider, Howard
Publication:Mortgage Banking
Date:Sep 1, 2006
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