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Lax federal supervision is allowing mortgage lenders to finance homes for people who cannot afford them in Buffalo and nationwide, prompting default and heartache for the homeowners and billions of dollars in losses for the taxpayers, a neighborhood advocacy group complained in a study released Tuesday.

Mortgage lenders quickly assailed the study, saying the program being criticized -- the Federal Housing Administration mortgage program -- is one of the few ways home loans make it to the inner city.

Analyzing federal data, the National Training and Information Center found that in poor neighborhoods in Buffalo, some lenders had default rates of up to 19 percent on their federally guaranteed mortgages between 1991 and 1995. Overall in the Buffalo area, the same lenders reported a default rate of less than 4 percent on those federally backed mortgages.

Of the 417 Buffalo-area homeowners who defaulted on the loans between 1991 and 1995, 191 lived in what the study called "high-default census tracts."

Nationwide, defaults in the FHA's mortgage programs cost taxpayers $45 billion in the last 10 years. The study's authors said many of the defaults occurred because lenders, knowing that the government would make good on the loans if the borrower could not, lent money to people who never really could afford the homes they bought.

"The FHA is misnamed," said Gale Cincotta, executive director of the center that released the study. "It ought to stand for 'Families HUD Abandoned.' If neighborhoods are poor, if they are predominantly black or Latino, the government gives mortgage bankers a green
light to rip off home-buyers there."

Nationwide, Ms. Cincotta said, lenders who offer the federally guaranteed loans often allow people to buy structurally unsound properties, encourage borrowers to falsify their financial records, and accept appraisals that vastly overvalue the homes they are financing.

Some lenders are far worse than others. While five local lenders had double-digit default rates in poor neighborhoods, M&T Bank, for example, had a default rate of only 3.1 percent.

Many lenders make questionable loans, Ms. Cincotta said, because the federal guarantee ensures that they make a profit even if the loans go bad. For that reason, she suggested that the federal government refuse to guarantee the full share of each loan, thereby putting some of the risk on the lenders.

Federal housing officials declined to comment on the study.

But the top executive for one of the Buffalo lenders included in the study, Power Funding Group Inc., said the study appeared to be at total odds with conventional wisdom, which criticizes many lenders for refusing to issue mortgages in the inner city.

"Now we're the ones getting tarred and feathered, rather than the lenders who will not participate in the city," said Thomas D. Ruthven, chief executive officer of Power Funding.

Ruthven said the higher default rate for inner-city neighborhoods was not attributable to shady business practices, but to the fact that poor people are naturally going to have a harder time paying back their loans.

"We know from the get-go that if you're lending to the lower-income group, you're going to have more defaults," he said.

The study pointed to five Buffalo-area lenders that had default rates of more than 10 percent in poor neighborhoods: Amerifirst Mortgage Corp., Empbanque Capital Corp., Power Funding, PNC Mortgage Corp. and Spectrum Home Mortgage Corp.

Much has changed, though, since those companies were making loans in Buffalo's inner city.

Amerifirst no longer makes the kind of loans criticized in the study, Empbanque has gone out of business, PNC is leaving the Buffalo market, and Spectrum is now run by Marine Midland Bank.

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