A report from the Chicago Fair Housing Alliance determined that the Federal Housing Authority's mortgage insurance program, which extends subsidized credit for people who might not otherwise qualify for loans, has led to a much higher foreclosure rate in the blighted neighborhoods the program is supposed to help. Lenders face zero risk and enjoy twice the profits on FHA-guaranteed loans, creating a strong incentive to make bad loans on shabby properties. Such loans are also based on the size of the mortgage rather than the applicant's income. Altogether, FHA-insured loans are three times more likely to default as conventional loans.

An FHA spokeswoman told the New York Times that the program may simply "require additional improvement and reform." But HUD Secretary Andrew Cuomo is proposing to expand the program, raising the qualifying mortgage limit from $170,362 to a $227,150 maximum. Writing in the New Republic, Jessica Korn comments that this expansion may be partly motivated by FHA's dire financial crisis. The agency paid out an additional $5.3 billion in claims in 1997 to mortgage bankers who foreclosed on 71,599 borrowers, an 18 percent jump over the previous year. The fees paid by borrowers on FHA-backed loans will temporarily boost revenues, but the loans themselves will lead to unknown future liability.

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