A rise in lender claims on FHA mortgage insurance is raising red flags about lending abuse in low- and moderate-income neighborhoods.

Borrowers and neighborhoods "have to be protected" from lenders who may be making bad loans, foreclosing, and collecting their money from the government, said Gail Cincotta, executive director of the National Training and Information Center. The consumer activist group noted that despite a booming economy the number of claims paid under the Department of Housing and Urban Development program reached 78,890 in fiscal 1999, which ended Sept. 30, up from 60,884 in fiscal 1996.

These claims totaled $6.5 billion, up from $6.07 billion last year and $4.2 billion in 1996, the consumer group said, and the average dollar amount of the claims has risen to $83,020, from $79,843 last year and $69,373 in 1996.

A HUD spokesman said the 3% rise in claims this year is to be expected given the 18% rise in loan origination under the FHA program. He said the foreclosure rate on FHA loans has remained at 1.1%.

Delinquencies on FHA mortgages have risen throughout 1999 while delinquencies on conventional loans have declined, according to a Mortgage Bankers Association survey. The survey said delinquency rates on FHA loans rose 17 basis points, to 8.72%, during the third quarter, while the rate for VA loans rose 14 basis points, to 6.90%. This has occurred while overall mortgage delinquencies have declined to 4.10% - the lowest level since first quarter 1995, when they stood at 3.92%.

Brian Carey, regional economist for MBA, said the problem stems from forays into the low down payment market by mainstream lenders. "The conventional market is skimming the cream of the crop, as far as low down payment borrowers and first-time buyers, and the FHA is really just getting people who can't qualify for the conventional loan," he said.

This has led to "fewer high-quality borrowers," in the FHA pool. New borrowers with good credit going into the FHA "would replenish the portfolio with good credit risk - and that's what is not happening right now," he said.

From 1992 to 1994, FHA delinquencies also rose because "the better quality borrowers in the program refinanced into a conventional product," he said.

HUD uses a computerized system to identify lenders with an above-average number of defaults and foreclosures under its FHA program. The program is designed to reduce defaults and foreclosures by protecting consumers from borrowing more funds than they can afford to repay.

HUD said about 7,000 lenders originate FHA-insured mortgages.

Authorization to originate them is revoked for lenders with a default rate at least three times higher than the average for local lenders, HUD said.

Lenders with default rates between 1.5 and three times the average are placed on probation. Twenty-seven lenders were suspended this year, but all could be reinstated, he said.

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