Homeownership

The Federal Housing Administration (FHA) provides federally backed mortgage insurance to hundreds of thousands of homeowners annually. Critics of FHA contend that unsound underwriting of FHA-insured loans in low-income urban communities has led to large numbers of foreclosures and vacant HUD-owned properties in these areas. They also contend that these properties remain vacant for long periods, attracting crime, undermining property values, and contributing to neighborhood blight. This report examines "early foreclosures"--those occurring within 18 months of the loan endorsement data. According to FHA, early foreclosures are an indicator of potentially unsound underwriting practices, such as lending to unqualified borrowers. This report (1) compares early foreclosure rates on FHA-insured single-family loans made in low-, medium-, and high-income areas nationwide and in six cities--Chicago; Washington, D.C.; Atlanta; Baltimore; Dallas; and San Bernadino; (2) compares across income areas the proportion of loans made in the six cities by FHA-approved mortgage lenders with and without early foreclosures; (3) identifies factors that influence early foreclosure rates; and (4) compares the length of time that single-family homes owned by HUD remained unsold in low-, medium-, and high-income areas in the six cities.

GAO noted that: (1) GAO's analysis of the FHA-insured single-family loans made during calendar years 1992 through 1994 nationwide and in the six cities showed that early foreclosures occurred infrequently but that early foreclosure rates were higher for low-income areas than for either medium- or high-income areas; (2) the early foreclosure rate for low-income areas nationwide was 0.45 percent (i.e., 4.5 early foreclosures occurring for every 1,000 mortgages insured) compared with 0.30 percent and 0.21 percent for medium- and high-income areas, respectively; (3) although this pattern prevailed in the six cities, there were also differences from one city to another; (4) for four of the cities--Atlanta, Baltimore, Dallas, and Washington, D.C.--lenders with early foreclosures made a larger proportion of their loans for properties in low- and medium-income areas and a smaller proportion of their loans for properties in high-income areas than did lenders that did not experience early foreclosure; (5) in San Bernadino, however, lenders with early foreclosures made a smaller proportion of their loans for properties in low-income areas and a larger proportion of their loans for properties in high-income areas than lenders without early foreclosures; (6) in Chicago, lenders with early foreclosures made a smaller share of their loans in medium-income areas than lenders without early foreclosures; (7) various factors influence the probability of early foreclosure; (8) GAO's analysis of the FHA-insured loans made in calendar years 1992 through 1994 in the six cities indicated that loans made for homes in poorer census tracts, smaller loans, and loans with higher loan-to-value ratios or higher interest rates were associated with higher probabilities of early foreclosure; (9) as of December 31, 1996, HUD held a total of 1,374 properties in its inventory in the six cities GAO reviewed; (10) GAO's analysis did not identify a pattern in the median time that these properties remained in HUD's inventory in different income areas; and (11) however, in five of the six cities and for the six cities combined, the proportion of properties that had been in inventory for more than 6 months was greater in low-income areas than in either medium- or high-income areas.