WASHINGTOON - Congress' retooling of the Department of Veterans' Affairs mortgage insurance program would place a greater burden on private lenders, who say the new rules would inhibit them from making the loans.

The VA loan changes were included in an $86.9 billion appropriations bill that would also revise Federal Housing Administration mortgage insurance.

New Foreclosure Formula

While changes in the FHA program would open the housing market to more first-time buyers, the VA portion of the bill was seen as having a chilling effect on lenders.

The big change would be in the formula used by the Department of Veterans' Affairs to handle foreclosures.

The department uses a "no-bid formula" to determine whether it will acquire a property at a foreclosure sale or merely pay off its loan guaranty and let the lender absorb losses above that amount.

The new formula would allow the government to calculate the loss it would sustain because of property devaluation. The new formula also would be based on an average of all losses nationwide, rather than considering each loss separately.

Critics of the measure contend that the new formula would reduce the number of properties taken over by the government, resulting in more losses being absorbed by private lenders.

The Mortgage Bankers Association of America estimated that the new formula would cost private lenders $15,000 to $20,000 on each no-bid.

"The no-bid formula is disappointing," said Joe Pickett, president of BancBoston Mortgage Corp. and a member of the MBA's executive committee.

"We think entitlement programs like the VA mortgage programs are highly appropriate," Mr. Pickett said. "But the government's putting us into no-bid situations is passing on the responsibility of government to the private sector.

"The effect is going to be that more bankers will recognize the cost of making VA loans is going up and they will rethink whether they can afford to make those loans. We anticipate more lenders will limit their VA exposure or get out of it altogether."

Sponsors of the measure estimated the revisions would save the government $406 million a year.

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