The mortgage industry is facing two hard questions:

Will the present flight from quality mean disaster down the road?

Mortgage lenders, eager to build volume and profits, are plunging into lending to people with impaired credit. They are also eagerly making home equity loans of all grades and in some cases lending up to 100% of equity.

Loans to low-income and moderate-income households have also been an area of marketing emphasis throughout the industry. They are often approved with alternative credit standards and carry high loan-to-value ratios. Now there are some early signs that delinquencies may be higher on such loans than on standard mortgages.

"There is pressure on mortgage companies to bring volume in the door because of excess capacity," says Larry Swedroe, vice chairman of the Residential Funding Corp. unit of Prudential Home Mortgage Co., Clayton, Mo.

"The result, unfortunately, is not only a price war but a credit war. I think it's a very bad decision. We're seeing B-minus paper thrown into A deals. We are not participating in that. If margins are high, you can afford some risks. If margins are tight, you can't. It's better to walk away."

Stuart Brafman, president and chief executive of Amerin Corp., the Chicago-based mortgage insurance company, says, "Because volume has declined, lenders are looking to all corners to get business. There's a blurring of niche lending to lesser credits. Lenders with little experience are looking into B and C (credits). They had better be careful, otherwise they may suffer the consequences. There may be a price to pay down the road."

Are increases in homeownership achievable in light of the modest gains in mortgage originations that are being projected for the next few years and the likelihood of cutbacks in federal programs?


President Clinton has vowed to achieve an increase in homeownership by the end of this century, without specifying an amount. At the same time, Fannie Mae has set a target of $1 trillion in home loans to those who are most in need of help.

Fannie says it did $100 billion in such loans last year and will have to stretch to do the same this year. The company expects industrywide single- family mortgage originations to drop this year to about $613 billion from last year's $752 billion and is projecting $642 billion in 1996 and $702 billion in 1997.

Mr. Brafman of Amerin is fairly sanguine about homeownership. "There can well be an increase in homeownership, and it can come from the group that is both credit-underserved and creditworthy. That segment is probably not as big as it has been estimated to be or as people would want it to be. But I believe it will push up the incidence of homeownership."

He adds: "Some of the old rules don't apply. New rules are being devised. This is being done in good faith, and it is also good business to try to expand the market. We're still in the process of learning, and there may be a price to pay" in the form of bad credit decisions.

But Mr. Swedroe of Residential is pessimistic: Projections "are politically easy to make, and nobody's going to be around to check the results. I discount them. We will see major program cuts, and they will have major effects on the access to housing."

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