Editorial | The foreclosure mess

Amid many causes, FHA and HUD oblivion stand out

06/04/2009 12:19 PM

07/10/2009 5:23 PM

How could this happen? How could hundreds of inexpensive new homes in the Charlotte area have been sold to people unable to pay the mortgage, who then lost their homes to foreclosure?

There's a short answer and a longer one. The short answer: Almost no one was paying attention as foreclosure problems mushroomed in starter home subdivisions.

Last year lenders foreclosed on more than 900 starter homes in Mecklenburg alone, up 150 percent from 2003.

As articles by Observer reporters Binyamin Appelbaum, Lisa Hammersly Munn and Ted Mellnik show, concentrated foreclosures in a neighborhood lower property values and can open the door to crime.

But there's a longer answer to how it happened: A perfect storm of factors came together. Underlying them is a dewy-eyed belief among most Americans that buying a home is always better than renting. The foreclosure epidemic shows that isn't always the case.

Add a national surge in easy-money mortgages aimed at low-income buyers. And agencies that should look out for homebuyers, such as the Federal Housing Administration, aren't enforcing their own rules. Since the FHA covers defaulted loans that it insures, lenders have no incentive to clean up their act.

Further, Charlotte city leaders naively believed that dozens of cheaply built, starter-home subdivisions were a good thing, adding "affordable housing." They didn't see problems as foreclosures beset those subdivisions.

What resulted is an outrage. As today's article reports, although the national foreclosure rate is 3 percent, at least 10 Mecklenburg subdivisions built by Beazer Homes USA have foreclosure rates of 20 percent to 34 percent. That is -- or ought to be -- unacceptable.

To be sure, homebuyers are at fault, too. Many didn't take precautions to protect themselves.

But in some cases the Observer investigated, homebuyers were victimized by inaccurate appraisals that overstated the worth of the home, or mortgage papers that "misstated" their incomes and debts, so it appeared they qualified for loans that, in fact, they didn't.

Knowingly falsifying information on a loan application is a federal crime. Intentionally overstating a home's value on an appraisal is illegal. We hope federal prosecutors are taking note.

The Federal Housing Administration in particular has been appallingly passive. The FHA has paid $5 million to cover defaulted loans in one Beazer subdivision alone: Southern Chase in Cabarrus County. Observer reporters who looked at loan documents found loans arranged by Beazer's mortgage subsidiary with clear misstatements, even though FHA rules required Beazer to do its own documentation of buyers' financial situations. Nevertheless, the FHA still insures new Beazer loans. And the Department of Housing and Urban Development, which oversees the FHA, said it wasn't aware of any problems in Southern Chase and didn't plan to investigate.

That reaction is ridiculous. HUD needs to make sure the FHA enforces its own rules, so that more homebuyers aren't caught in the same sorry mess.

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