POLITICS

Broken Government Website Could Hurt The Housing Market

"It’s kind of insane we run our largest insurance company this way," said a former housing official.

A U.S. government website used to police mortgage lenders has been malfunctioning lately, threatening oversight of a trillion-dollar, taxpayer-backed housing program and possibly delaying a much-needed boost in credit availability for borrowers affected by the Great Recession. 

The Department of Housing and Urban Development’s public online database, known as Single-Family Neighborhood Watch, is where lenders are required to report seriously late payments on mortgages insured by the Federal Housing Administration -- the primary source of home loans for first-time homebuyers and borrowers with mediocre credit -- within the first two years of a loan. 

Neighborhood Watch is HUD's primary tool for keeping tabs on the financial health of the FHA mortgage insurance program, spotting possible lender abuse, and preventing unnecessary foreclosures. The housing agency has required financial companies to use the website for the past 10 years to self-report various data and issues, rather than submit paper reports, federal records show. The agency also uses the database to assess whether some borrowers’ mortgages should be modified and to grade its loan servicers’ performance at keeping distressed borrowers in their homes.

HUD describes the database as a "critical component" of its risk management strategy. 

"This needs to be operational as soon as possible," said Brian Chappelle, a former official at FHA who now works with lenders through his consultancy, Potomac Partners. Chappelle described Neighborhood Watch as an "invaluable" tool for lenders.

But the website has crashed several times since the start of the year, Chappelle said. It began sporadically failing beginning on July 20, he said, and has been completely down since July 27. As a result, lenders can’t log in to submit their reports, and the public-facing site can’t be accessed by state or federal regulators.

George Gonzalez, a HUD spokesman, said the agency hopes to have the site back online "in the near future." He declined to detail the agency’s deadline.

Neighborhood Watch is also important to other government agencies, such as the Justice Department, which uses the database for mortgage fraud prosecutions, and has cited it in cases against big banks such as JPMorgan Chase and Wells Fargo, court filings show. Other federal regulators, such as the Consumer Financial Protection Bureau, use the website to help supervise financial institutions, according to federal records. Community groups use it to highlight lenders who may be making unsafe loans, particularly in inner-city or minority neighborhoods, according to testimony to the Federal Reserve.

Meanwhile, lenders use the website to grade the performance of their mortgages relative to their competitors. Financial institutions whose mortgages experience much higher delinquency rates could face government sanctions, such as being kicked out of the FHA program -- so keeping tabs on their peers helps lenders determine whether they’re making good mortgages or enough of them, Chappelle said.

HUD, now led by Secretary Julián Castro, recently proposed a change in how the agency grades lenders, in an effort to jumpstart lending to borrowers who have had difficulty obtaining mortgages.

The current system discourages lending to borrowers with spotty credit because lender evaluations aren't based on the type of borrowers being served, Chappelle said. The new system would take borrowers’ credit profiles into account when grading lenders, comparing the delinquency rates of borrowers with low credit scores rather than simply comparing delinquency rates.

This would give lenders confidence that they could lend money to borrowers with mediocre credit -- historically the typical FHA borrower -- without fear of future government lawsuits, Chapelle explained.

"Of all the initiatives the administration has launched to expand access to credit, this would have the most tangible impact," he said.

Government lawsuits targeting lender errors after mortgage defaults have chilled lending and crimped economic growth, say financial institutions and researchers at the Urban Institute, a Washington policy organization.

Borrowers who obtained FHA-insured mortgages in 2007 and early 2008 had an average credit score of less than 640, federal data show. That figure jumped to more than 700 in 2011 as lenders tightened requirements. The average score has since fallen to 677, according to the latest quarterly data.

But credit is still tight for borrowers with credit scores under 620, who have historically relied on FHA to buy homes. For example, about a quarter of new FHA-insured mortgages in 2009 went to borrowers with credit scores under 620. That share has since dropped to about six percent, according to HUD. 

The Obama administration has tried to put lenders at ease, but government statements haven’t been enough to give lenders confidence, Chappelle said. "When it comes to data, the numbers are the numbers," he said. "They’re not subject to interpretation."

Gonzalez, the HUD spokesman, declined to answer questions about the malfunctioning Neighborhood Watch database’s impact on mortgage lending.

"HUD and its web contractor have been working aggressively to restore the system as soon as possible. Unfortunately, despite the contractor's efforts, the system has not yet been fully repaired," Gonzalez said in an emailed statement.

"Instead of rushing to patch a broken system, possibly leading to outdated information being provided, the contractor is working to make improvements ensuring the system provides correct and valid information to its users," he added. "We're sorry for any disruption this may cause to our partners but hope to have a fully functioning system in the near future."

The Virginia-based contractor ActioNet won the right to service Neighborhood Watch in July 2014, according to the firm’s website. Michelle Barnes, an ActioNet representative, did not respond to a request for comment.

HUD has long been plagued by a lack of resources and administrative capabilities, say proponents of the agency's efforts to expand access to credit. 

Julia Gordon, a former federal housing policy official who now works at the Center for American Progress, says Congress isn’t providing enough money to allow HUD and FHA to improve their operations. "It’s kind of insane we run our largest insurance company this way," she said. 

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