BluefoxToday blog : FHA struggling with climbing mortgage defaults

FHA struggling with climbing mortgage defaults

FHA, or the Federal Housing Administration, almost vanished from the home loan scene a few years ago when conventional mortgage lenders came up with their own attractive loan programs for subprime borrowers. In 2006 FHA's market share was a paltry 2%. Then the real estate market imploded, mauling the mortgage industry in the process into a bloody pulp. As a result banks were reluctant to make home loans unless they had a government insurance against possible defaults and all of a sudden FHA was back in the saddle, becoming for many the favorite go-to-guy. In the fourth quarter of 2008 FHA's market share had jumped to about 30%, as per Inside Mortgage Finance.

The agency has played a crucial role in securing financing for first-time buyers and doing refinances for homeowners during this mortgage market meltdown. But now dark clouds are moving in. Delinquent loan statistics are climbing ominously, reaching 7.5% at the end of February, when a year ago the number stood at 6.2%. The reserve fund backtracked to around 3% of its mortgage portfolio last year, when in the fiscal year of 2007 it was a healthy 6.4%. By law it has to be 2% or better.

These numbers speak for themselves. All is not well at FHA. At the core of the problem, it seems, is the directive that FHA lenders cannot employ risk-based pricing when underwriting loans. High-risk borrowers pay the same insurance premiums as do the low-risk ones. This was actually mandated by Congress last summer, a move that didn't make much sense then to many industry experts. High-risk anything should pay a premium for being that.

It really is rather bizarre that while the country is struggling mightily with mortgage defaults and everyone ought to know by now that they were mainly caused by lax lending standards, Congress keeps on promoting the same tolerant practices. Doing that right in the middle of this unusual challenge. As if they had learned nothing from the grave experience still roiling around them.

FHA will likely soon need a government bailout to stay in business. But for how long are its services needed is anyone's guess. Once the mortgage industry recovers and begins offering subprime loans again, which is a predictable possibility, it could well be shown a path to the previous obscurity.

 

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Provided by: 

Esko Kiuru
Mortgage, real estate and apartment industry analyst 

www.BluefoxToday.com - syndicated mortgage, housing and property management blog

eskokiuru@gmail.com
My cell: 702-499-1006

Comment balloon 19 commentsEsko Kiuru • April 05 2009 12:49PM

Comments

Essentially the FHA has been mandated to ignore market pricing fundamentals.  The private mortgage industry did this, and now many of the same people that took high risk/high rate mortgages are the ones being bailed out.  It's just a matter of time before we have to bailout the FHA again...

Posted by Stuart Dobson (eLoanRates.org) almost 9 years ago

From 2% to 30% share to possible future bailout of FHA is quite the ride. We are living in exciting if not completely unpredictable times for sure Esko.

Posted by Gary Woltal, Assoc. Broker Realtor SFR Dallas Ft. Worth (Keller Williams Realty) almost 9 years ago

Issue is FHA continues to approve debt ratios in the 50-55% levels.  I just had two deals approved this week with 51% DTI and a 48% DTI.  What happen to the 31/36 ratios?  Insurance is added on to the loan amount with a .75 premium collected every month. 

The problem will correct itself because "new buyers" today watch whats going on in the market today and learn from the mistakes "old buyers" did.  Even if they get approved at the 50% dti levels, the last thing they want to do is follow a trend and losing their home in 2009.

Government waits till something major happens, then make corrections after.  They will never change.

Posted by Sameer Punjani (mygpsagent.com) almost 9 years ago

It is amazing how many persons in real estate long for the days of no money down and DPA programs which have an even higher rate of delinquency and default.  I cannot say I am suprized...I am a firm believer of having some skin in the game, and the chances of a walk-a-way will lessen.

Posted by Jim Crawford, Jim Crawford Atlanta Best Listing Agents & REALTOR (RE/MAX Paramount Properties) almost 9 years ago

I found a nice little .pdf this afternoon.  It was a good read.  Here is a link to it.

http://www.kc.frb.org/Publicat/econrev/EconRevArchive/1990/3q90sell.pdf

enjoy

Posted by Ross Westerman almost 9 years ago

But when will the mortgage industry recover? It's anyone's guess. What's yours?

Posted by Linda Greco Rich, ABR, SRES, Harford County Specialist (Exit Preferred Realty) almost 9 years ago

Esko,

Not sure if this is related but I see many FHA loans buyers agents are bringing us on offers but they seem to die before they reach the closing table...I wonder if this is part of the problem of risk.

Posted by Neal Bloom, Realtor CRS-Weston FL Real Estate (eXp Realty) almost 9 years ago

Esko, Congress seems to think they know best, maybe now they see that they don't.

Just one added thing for the person above that commented on the ratio's.  FHA has been approving loans with 52+ ratios for a few years now, and they seen to be relaxing that even more lately.

Posted by George Souto, Your Connecticut Mortgage Expert (George Souto NMLS #65149 FHA, CHFA, VA Mortgages) almost 9 years ago

Esko, in our high priced real estate area, FHA loans were not used for many years, but have now picked up at a brisk pace, now that home prices are much lower.  Hopefully that will help their situation!

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Posted by Regina P. Brown, e-Pro Realtor (California Coast & Country Homes, Inc.) almost 9 years ago

Stuart,

The mandate to ignore pricing fundamentals is about to hurt FHA seriously.

Posted by Esko Kiuru almost 9 years ago

Gary,

We certainly are on a ride to remember.

Posted by Esko Kiuru almost 9 years ago

Sameer,

Those ratios seem rather generous, and dangerous.

Posted by Esko Kiuru almost 9 years ago

Jim,

A healthy, sustainable real estate market can be achieved with borrowers who have a decent skin in the game.

Posted by Esko Kiuru almost 9 years ago

Ross,

Thanks for giving us another viewpoint.

Posted by Esko Kiuru almost 9 years ago

Linda,

We are already seeing some cautious signs of recovery around the country, including Las Vegas. But it'll probably be in slow motion.

Posted by Esko Kiuru almost 9 years ago

Neal,

It seems to be risk-related, yes.

Posted by Esko Kiuru almost 9 years ago

George,

Promoting homeownership is a novel idea, but it has to be done with the market forces in mind.

 

Posted by Esko Kiuru almost 9 years ago

Regina,

Right now FHA is playing a very useful role in keeping the market going. It should employ more stringent underwriting guidelines, though, so the taxpayer doesn't have to dip in again. 

Posted by Esko Kiuru almost 9 years ago
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