SAN FRANCISCO - A popular type of home loan for families with low to moderate incomes is showing sharply higher delinquency rates than other mortgages, an industry leader warned this week.

Leland Brendsel, chairman of the Federal Home Loan Mortgage Corp., said that low-down-payment loans for people in that income range are going delinquent at up to double the rate for traditional mortgages. He called the performance "disappointing."

Mr. Brendsel's remarks, made to reporters at a conference of thrift executives here, highlight mounting concerns about the credit quality of loans that have been extended to lower-income homebuyers.

Amid mounting political pressure, banks and other lenders have greatly increased their originations of such loans over the past two years. But it remains unclear just how well the loans will perform over time.

"I can say overwhelmingly that, not only based on our own analysis, but conversations I have had with other lenders, that there has been disappointment with the performance of affordable housing loans," Mr. Brendsel said.

His agency, known as Freddie Mac, and the rival Federal National Mortgage Association, or Fannie Mae, both have been under pressure by regulators to increase their lending to underserved groups, especially minorities.

Also, many in the industry are now concluding that with low home-price appreciation and stagnant incomes, the mortgage market will grow primarily by lending to these groups.

But some lenders believe that doing so may be fraught with risk.

Specifically, Mr. Brendsel said loans with a 95% loan-to-value ratio made under affordable-housing programs have a delinquency rate 50% to 100% higher than conventionally underwritten loans with the same LTV ratio. The low-down-payment loans are the centerpiece of many lenders' affordable- housing programs.

Mr. Brendsel said Freddie Mac believes delinquencies are higher because such borrowers are not required to hold the customary one-month reserve of principal and interest payments that other borrowers must show. In addition, he said, such borrowers may have poor credit histories.

As a result Mr. Brendsel said, Freddie Mac plans to stop some of its experimentation. For example, the agency will no longer buy loans with a 5% down payment where 2% is given by a third party.

In addition, Freddie Mac has instructed lenders to intensively underwrite low-down-payment loans to borrowers with weak credit histories. The agency itself will scrutinize these loans more closely, according to its chairman.

Earlier this year, Mortgage Guaranty Insurance Corp. also warned that a preliminary analysis of its portfolio of affordable-housing loans showed significantly higher defaults than on conventionally underwritten loans with the same ratios of loan to value.

MGIC placed the blame on a lack of adequate purchase counseling to the borrowers.

The Office of Federal Housing Enterprise Oversight, which regulates the safety and soundness of Fannie Mae and Freddie Mac, has also found significantly higher defaults in a study of the portfolios of the two secondary-market agencies.

Fannie Mae has not released numbers on the performance of its affordable-housing loans.

Still, many in the industry believe that the rewards of such lending outweigh the risks.

Speaking to reporters at the same conference, Gregory T. Barmore, chairman and chief executive of GE Capital Mortgage Corp., asserted that affordable-housing lending is "good business."

He said a portfolio could be structured so that higher-risk borrowers are subsidized by lower-risk borrowers.

"If you build the whole portfolio right, you get a good-quality total asset," Mr. Barmore said.

In addition, Mr. Barmore said delinquencies on affordable-housing loans lead to defaults less often than those on higher-balance loans. But when low-income borrowers miss a payment, lenders must follow up more quickly to make sure the borrower can catch up, he said.

At the same conference, Aida Alvarez, director of the oversight office, said her agency believes that neither Fannie Mae nor Freddie Mac are likely to endanger their fiscal health in meeting their affordable-housing goals.

This year, both lenders must insure that 30% of the units they finance are for borrowers with low or moderate incomes and that 30% are in center- city neighborhoods.

The goals are expected to rise next year.


Fannie Mae announced separately at the meeting - the Western Secondary Mortgage Market Conference sponsored by the Western League of Savings Institutions - that it had established new underwriting guidelines for nontraditional credit reports.

Fannie said it developed the standards with Associated Credit Bureaus, a trade association representing credit-reporting agencies.

Alternative sources of credit data covered in the guidelines include payments of rent, utility, and cable TV bills, as well as other regular payments such as medical, auto, and life insurance and school tuition.

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