Changes announced recently to in the government's oldest home loan program will go a long way toward protecting owners from being ripped off by shady contractors who abscond without finishing the jobs they were hired to perform.

Under a final rule approved by the Department of Housing and Urban Development, checks from lenders under the FHA Title I home improvement loan program must be made out solely to the home owner or jointly to the borrower and the contractor making the improvements.

The new requirement is intended to prevent the misuse of funds by "dealer" contractors who, as a service to their customers, take the loan application from the owner and place it with lenders with which they have a close working relationship.

To make sure funding lenders are aware of disagreements between borrowers and contractors, and to alert them to shoddy workmanship or unfinished projects, the new rules also require the lender to speak directly with the owner before dispersing the loan proceeds.

Title I of the National Housing Act of 1934 was the first federal mortgage program. Under the program, the Federal Housing Administration (FHA) insures home improvement loans to home owners who have little or no equity in their homes. Loans of up to $25,000 are available for as long as 20 years.

Title I borrowers are largely people who purchased with as little as 3 percent to 5 percent down and have not had a chance to accumulate significant home equity. As a result, they are unable to qualify for conventional equity-based loans to make needed home improvements.

Loans may be used to finance a wide variety of alterations and repairs to improve or protect the basic livability and utility of a home, including structural additions and alterations, siding, roofing, insulation, plumbing, heating and cooling systems, solar energy systems, interior finishing and landscaping.

Title I loans can be obtained in one of two ways: directly from a lender or through home improvement contractors working as dealers for lenders. Almost two-thirds of the loans are direct, while the other 37 percent were dealer transactions. But in the latter group, too many unethical contractors were taking off with the funds after doing a lousy job. In some cases, they didn't complete the job, and sometimes they didn't do anything at all.

However, the new check disbursement requirements should help put an end to that, said Peter Bell, executive director of the Home Improvement Lenders Association. The new rules will "ensure that consumers who get Title I loans won't fall victim to unscrupulous contractors and that all of their hard-earned dollars actually go into making their homes their castles," he said.

The new rules also raise the minimum net worth requirements for loan correspondents and dealers and increase the mortgage insurance premium to a level that makes the program self- sustaining.

But the current loan limit of $25,000 for single-family homes has been left unchanged. Industry groups have been lobbying HUD to raise the ceiling so owners can undertake more substantial improvements. The last time the limit was increased was 10 years ago.

For more articles by Lew Sichelman, please press here.

Published: November 26, 2001

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When Lew Sichelman first started writing about housing in 1969, he was the youngest real estate writer in the country. Now, 37 years later, he's one of the oldest -- and most decorated. He has been rated the top housing columnist in the country by the National Association of Realtors as well as by his peers in the National Association of Real Estate Editors. Indeed, NAREE has recognized his work on numerous occasions. One year - due to his advancing age, he can't recall which one - he earned top honors in the annual NAREE Journalism Contest in three out of the four major writing categories. It was the first time one writer has won so many NAREE awards in a single year. Known for his ability to make even the most difficult topics understandable, Sichelman also has been honored by the National Association of Home Builders and the Mortgage Bankers Association. He began providing in-depth coverage of and consumer-oriented information about housing and housing finance at the Washington Daily News, where he was real estate editor. He held that same position for nine more years at the Washington Star, which purchased the News in 1972. The Star, a so-called "writer's newspaper" which also had the misfortune of being an evening paper, was put out of its misery in 1981, and Sichelman, who had begun self-syndicating his column in 1978, decided to become a full-time columnist. Today, his column, "The Housing Scene," is distributed by United Media to newspapers throughout the country. He also is on the staff of National Mortgage News, an independent newspaper which is considered the bible of the mortgage business. And he writes for numerous other publications, including MarketWatch.com, where he answers readers questions once a week, Sports Illustrated (don't ask), RealtyTimes.com, BigBuilder and others. Sichelman is married, the father of five and grandfather of eleven.