Help from the government wasn't enough to ward off the sleepless nights and bouts of panic that Steven and Nanette Borden went through when they bought their first home in 1995.
And when a post-childbirth illness left Nanette Borden unable to work last year, their home again became a source of worry as the Croydon, Pa., couple fell seven months behind in mortgage payments. Denied both a loan and the chance to make partial payments, the Bordens now fear they will lose their federally insured home to foreclosure."I'm ready to throw in the towel," said Steven Borden, who manages an auto parts store. "Why would the mortgage company take a second chance on me when they can foreclose and get their money back from the government?"
Even though banks and mortgage companies are required to help federally insured borrowers like the Bordens, the more common response is to recover the money by foreclosing on the mortgages, according to housing activists. That's one reason foreclosures on mortgages insured by the Federal Housing Administration jumped 18 percent last year, costing taxpayers a total of $5.3 billion in claims, they say.
That increase, along with allegations of exaggerated FHA property appraisals and the sale of poor-quality FHA-insured homes, has prompted calls for congressional hearings to explore possible management problems at the Department of Housing and Urban Development, which runs the FHA.
The public examination would come as HUD Secretary Andrew Cuomo tries to rebuild the department's reputation, tarnished by problems with waste and fraud. The scrutiny could also hurt HUD's request for a $900 million budget increase in 1999, to $25 billion.
Rep. Rick Lazio, R-N.Y., has requested a General Accounting Office review of FHA programs. Lazio, chairman of the House subcommittee on housing and community opportunity, is concerned about the 23 percent rise in FHA mortgage delinquencies since 1988. Delinquencies on conventional mortgages fell by 8 percent during the same period.
"It appears that FHA's performance went in the opposite direction of economic trends, which leads me to believe that there may be fundamental problems in the program and its management," Lazio wrote to GAO Comptroller General James Hinchman last month.
Loans insured by the FHA help low- and modest-income buyers by offering more flexible credit requirements and smaller down payments. In 1997, FHA-insured loans totaling $68 billion were used to purchase 783,000 single-family homes.
HUD officials say the jump in foreclosures, from 60,884 in 1996 to 71,599 in 1997, is deceiving because more than half occurred in Southern California, where a sour economy led to heavy job losses and a deflated real estate market.
But housing activists for the poor say the increase more likely reflects the Bordens' experience - lender reluctance to use special HUD programs to help troubled borrowers.
Since 1996, HUD has required lenders to help homeowners keep their houses when they can't meet their payments because of a change in income or expenses. Among other options, payments can be reduced or suspended temporarily, and interest rates can be reduced.
Private mortgage companies must offer these options to families with FHA-insured loans. Still, that's no guarantee the families will qualify. The Bordens' lender, for example, decided the couple was too great a risk for two such programs. The couple's combined income was about $40,000 when they bought their home and fell to $32,000 when Nanette Borden got sick.
The Philadelphia Unemployment Project, a nonprofit advocacy group for the poor, recently surveyed 75 independent housing counselors in 30 states and found that more than two-thirds had trouble getting lenders to help homeowners who run into financial trouble. John Dodds, director of the project, said it's easier for lenders to simply foreclose and recover their money from HUD.
"Mortgage companies aren't set up to be social service counselors," Dodds said. "If they don't get their money, they put you into foreclosure. That's the drill."
Because the HUD programs requiring lenders to help troubled borrowers are relatively new, lenders, housing counselors and borrowers are not yet familiar with them, said Joe McCluskey, FHA director of asset management.
In Chicago, which has more than 500 vacant FHA properties, Mary Peary and her neighbors on North Latrobe Street said an FHA-insured home sat in squalor for nearly three years after a family was evicted in 1994. The grass went uncut. Every window was broken. The toilets, bathtub, sinks, lighting fixtures, even the aluminum siding were stolen. And nothing was done to secure the building.
Then came a procession of crack and heroin addicts whose nightly cravings turned the home into a drug den. "The neighbors would sit there on the porch and watch them heat it in a spoon and shoot up," Peary said. "It was terrible."
A federal study of six cities found that, on average, HUD homes are resold in fewer than five months.
But houses in poorer communities typically stay vacant longer. The GAO has audited HUD's property management pro-gram, and the department is preparing a response. Sylvia Martinez, policy adviser to the FHA commissioner, wouldn't discuss the findings but acknowledged the possibility of problems.
"The question is what is the appropriate response and we are evaluating that right now," she said.
Concern about collusion between lenders and property appraisers prompted Secretary Cuomo last year to threaten fines and other penalties if any such fraud is uncovered.
Chris and Jacque Krzyzanowski of Joliet, Ill., questioned whether collusion was involved when they paid $25,000 more for their FHA-insured home than it was worth. They say the mortgage lender gave them two exaggerated appraisals.
Both surveys declared the home structurally sound, the couple said. But they soon learned the window frames were rotted and would cost $19,000 to replace. They later found the wiring was faulty and a large hole in a bedroom wall had been filled with discarded clothing and wallpapered over.
Several years later, when the couple refinanced, a new appraisal estimated the home's value at the time of purchase was only $88,000, rather than the $113,000 that they paid. "The house isn't worth anywhere near what we have mortgaged out on it," Jacque Krzyzanowski said. "We've got ourselves to blame for being naive, but we're also victims of a real yucky system."