GAO: Insurers Would Reject Two-Thirds of FHA Borrowers

A study from the General Accounting Office has found that two-thirds of FHA-insured borrowers in 1995 would have been rejected by private insurers for failing to meet loan-to-value and qualifying ratios.

Among low-income and first-time homebuyers, the percentage was even higher. Seventy-seven percent of first-time homebuyers who took out FHA loans, and 85% of low-income FHA borrowers in 1995 would not have met those standards, the report said.

The GAO's findings are likely to figure into next year's congressional debate on the role of the Depression-era housing program, which has insured 24 million mortgages since its inception, including 570,000 last year.

Once a dominant force in the market, its share of mortgages has shrunk since 1990. In 1994, only 15% were insured by the FHA.

Still, private insurers complain that it competes unfairly with their programs, and they have joined with Republicans to trim it, perhaps by confining it to low-income borrowers. They also want HUD to trim its insurance coverage from 100% of the loan amount to a smaller number.

Rep. Rick Lazio, R-N.Y., who requested the GAO report, has promised to introduce legislation to rewrite the FHA program next year. He leads the House Banking subcommittee on housing and community opportunity.

But the Mortgage Bankers Association, whose members write most FHA- backed loans, is hailing the report's conclusions as a victory for their side.

"It does validate our fundamental belief that FHA serves homebuyers who are not adequately served by the private sector," said Brian Chappelle, senior staff vice president of corporate relations.

Indeed, the FHA program is "the first rung in the housing chain," and it ultimately yields new customers for private insurers, Mr. Chappelle said.

In a press statement, Rep. Lazio sidestepped the report's conclusions that the FHA insures loans others wouldn't, particularly in the low-income and minority markets.

Instead, he said the program should be reevaluated in the context of rapid technological changes in the mortgage industry.

"If we face these changes unprepared, we could seriously jeopardize FHA and other government insurance programs that provide access to mortgages for low-income, minority, and other underserved groups of borrowers," Rep. Lazio said in the statement.

The specific conditions that would disqualify most FHA borrowers for private insurance, according to the GAO, were:

The loan-to-value ratios of their mortgages exceeded 97%, while FHA insures loans whose ratios exceed 100%.

Housing expenses made up more than a third of their income.

Their total debt exceeded 38% of their incomes, while the FHA program allows borrowers to use 41% of their income to service debt.

In a letter to the GAO, the Mortgage Insurance Companies of America protested that the agency had overstated the ratio of FHA borrowers who would not qualify for private insurance. Like the FHA, private insurers may choose to apply the loan-to-value and qualifying ratio standards with some flexibility, the trade group said.

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