Lenders usually require mortgage insurance when a home buyer has a down payment of less than 20 percent of the value of the home because foreclosures are more likely on these loans than on those with higher down payments. As the principal provider of federally backed mortgage insurance, FHA insured 32 percent of the insured mortgages originated in 1995. However, FHA fulfills an even larger role in providing insurance for some groups of borrowers, particularly low-income home buyers, minorities, and central city residents. FHA provides most of its single-family mortgage insurance through the Section 203(b) program, which covers loans for purchasing a new or existing one- to four-family home. The 203(b) program, among other programs, is supported by the Mutual Mortgage Insurance Fund (MMI Fund), which is funded by revenue from insurance premiums and foreclosed property sales. By law, the fund must meet or endeavor to meet statutory capital ratio requirements: that is, it must contain sufficient reserves to cover the estimated future payments of claims on foreclosed mortgages and other costs. Other FHA insurance programs for single-family home loans include the Section 203(k) program, for purchasing or refinancing and rehabilitating a home at least 1 year old, and the Section 234(c) program, for purchasing a unit in a condominium project. A mortgage loan is commonly considered “in default” when the borrower misses three consecutive monthly payments and a fourth payment is due. At that point, foreclosure proceedings against the borrower become a serious possibility. In the case of FHA-insured loans, once the foreclosure process is completed, the lender files an insurance claim with HUD for its losses (unpaid mortgage balance and interest, along with the costs of foreclosure and other expenses). After the claim is paid, the lender transfers the title to the home to HUD, which is responsible for managing and selling the property. HUD-owned properties generally remain vacant until they are resold. At the end of fiscal year 1996, HUD had about 24,700 single-family properties in its inventory. The purpose of HUD’s property disposition program is to reduce the inventory of acquired property in a manner that expands homeownership opportunities, strengthens neighborhoods and communities, and ensures a maximum return to the mortgage insurance fund. Although FHA has always received enough in premiums from borrowers and other revenues to cover the costs of foreclosed MMI Fund loans, losses totaled about $12.8 billion in 1994 dollars, or about $24,400 for each foreclosed and subsequently sold single-family home over the 19-year period ending in 1993. To mitigate losses to FHA and hold lenders accountable for the quality of the loans they make, FHA performs several activities related to the approval, monitoring, and recertification of mortgage lenders participating in FHA’s programs. For example, FHA monitors, by mortgage lender, the percentage of loans in default or on which FHA has paid the lender a claim. FHA also conducts on-site reviews of the loan origination and servicing practices of selected lenders. In addition, in 1996, FHA issued guidelines intended to promote the use of special forbearance plans, mortgage modifications, and other tools to help FHA borrowers in default remain in their homes whenever possible and to mitigate losses to FHA resulting from loan foreclosures. Nationwide, early foreclosures did not occur for 99.68 percent of the FHA-insured single-family loans made during calendar years 1992 through 1994. However, early foreclosure rates were higher for low-income areas than for either medium- or high-income areas. Nationwide, the early foreclosure rate for low-income areas 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. Federal regulations require FHA to monitor the performance of FHA-insured loans by mortgage lender but not by income area. Consequently, FHA does not have criteria for determining what would constitute excessively high early foreclosure rates for low-, medium-, or high-income areas nationwide or in a specific geographic region. Consistent with the nationwide pattern, early foreclosure rates in the six cities were highest for low-income areas, but these rates and the proportion of early foreclosures occurring in each income area varied by city. Within 18 months, foreclosures occurred on 254 of the 50,323 loans made in the six cities, for an early foreclosure rate of 0.50 percent. For the six cities combined, the early foreclosure rates for low-, medium-, and high-income areas were 0.80 percent, 0.45 percent, and 0.30 percent, respectively. Among the individual cities, the early foreclosure rates for low-income areas ranged from 0.47 percent in Washington, D.C., to 1.45 percent in Dallas. For medium-income areas, they ranged from 0.15 percent in Chicago to 1.02 percent in San Bernadino, and for high-income areas, they ranged from zero percent in Washington, D.C., to 0.86 percent in San Bernadino. San Bernadino had the highest early foreclosure rate (1.05 percent) for all income areas combined. According to HUD and San Bernadino city officials, job losses associated with military base closings and corporate downsizing have been a primary cause of foreclosures on FHA-insured mortgages in San Bernadino. Chicago had the lowest early foreclosure rate (0.26 percent) for all income areas combined. Table 1 shows early foreclosure rates in the six cities by income areas. For the six cities combined, the percentage of early foreclosures occurring for low-income areas was disproportionately high relative to the percentage of loans made for homes in these areas. As shown in appendix I, for the six cities combined, low-income areas accounted for 44.5 percent (113 of 254) of the early foreclosures, compared with 27.9 percent (14,050 of 50,323) of the loans made. This pattern also held true for the six cities individually. Among the six cities, the proportion of early foreclosures occurring for low-income areas ranged from 8.9 percent (5 of 56 early foreclosures) in Baltimore to 66.7 percent (6 of 9 early foreclosures) in Washington, D.C., while the corresponding proportions of loans made for properties in these areas were 7.5 percent and 39.4 percent, respectively. In two of the six cities—Baltimore and Dallas—the percentage of early foreclosures for medium-income areas was disproportionately high relative to the percentage of loans made for homes in these areas. For example, in Baltimore, medium-income areas accounted for 46.4 percent of the early foreclosures, compared with 42.2 percent of the loans made. In high-income areas in each of the six cities, the percentage of early foreclosures was smaller than the percentage of loans made for properties in these areas. Appendix I provides additional details on early foreclosure rates in the six cities. For the six cities combined, lenders with early foreclosures made a larger percentage of their loans for properties in low- and medium-income areas and a smaller percentage of their loans for properties in high-income areas than lenders without early foreclosures. Lenders with early foreclosures made 30.3, 43.1, and 26.6 percent of their loans for properties in low-, medium-, and high-income areas, respectively, while the corresponding figures for lenders without early foreclosures were 24.7, 40.7, and 34.5 percent. This pattern also prevailed in four of the individual cities—Atlanta, Baltimore, Dallas, and Washington, D.C. 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. Also, in Chicago, lenders with early foreclosures made a smaller share of their loans in medium-income areas than lenders without early foreclosures. The relative proportions of loans made for properties in the different income areas of each city by lenders with and without early foreclosures are shown in table 2. Additional details about differences in lending patterns among lenders with and without early foreclosures appear in appendix II. For FHA-insured loans made during calendar years 1992 through 1994 in the six cities we reviewed, we found that the following factors were associated with early foreclosure rates: (1) the relative income level of the census tract where the property was located (expressed as the ratio of the per capita income for the census tract to the per capita income for the city), (2) the loan amount, (3) the loan-to-value ratio, (4) the loan interest rate, and (5) the city where the property was located. Other things being equal, loans made for properties in poorer census tracts, smaller loans, loans with higher loan-to-value ratios, and loans with higher interest rates were associated with higher probabilities of early foreclosure. Our analysis also showed that loans made for homes in San Bernadino were associated with higher probabilities of early foreclosure, possibly reflecting the loss of military and defense industry jobs in the San Bernadino area. Our analysis also showed that loans made in poorer census tracts tended to be smaller and to have higher loan-to-value ratios and higher interest rates—all factors that increased the probability of early foreclosure. The relationship between lower incomes and loans with these characteristics may partially explain why early foreclosure rates were higher in low-income areas than in either medium- or high-income areas.