Here’s a story that I’ve been following for some time now. It’s interesting to me because I used to be in the mortgage business. That means I kind of know where the bodies are buried.
However, that’s not why you should read it.
It should interest you because when this one blows up you will be on the hook for every single penny.
You see, subprime loans never really went the way of the dinosaur. In fact, your Uncle Sam has been using FHA loans to fund non-prime borrowers for some time now—all the way up to $729,750 in some cases That’s how desperate we’ve become to prop up home prices.
The funny thing is that we are expecting different results this time.
However, the reality is the agency expects defaults on 24% of all loans insured in 2007, and 20% of those backed in 2008.
Those by the way, were the default rates that imploded the entire sub prime industry. Go figure.
As for the FHA it looks like it’s only a matter of time now before it needs to be bailed out.
From MarketWatch by Rex Nutting entitled: FHA reserves fall below 2% minimum, auditor says
“A large increase in foreclosures has pushed the reserve fund at the Federal Housing Administration to a record-low level, according to an independent review of the federal agency’s books released Thursday.
The FHA’s reserves dropped to 0.53% of its total insured mortgages, less than the 2% required by law. The reserves measure how much capital the FHA has beyond the funds it has put aside for expected losses over the next 30 years.
As of Sept. 30, the FHA had $31.5 billion in total reserves, representing 4.5% of its insurance in force. Read the full FHA report.
Under most economic scenarios, the reserve fund would remain positive, the independent actuarial review said. The baseline scenario assumes that home prices will fall another 6.5%, leading to a significant increase in foreclosures.
The FHA has become a major factor in the housing industry, stepping in to guarantee about a fourth of all mortgages sold in the past year. As of the second quarter, about 50% of all first-time buyers had a mortgage insured by FHA.
The FHA has become a major factor in the housing industry, stepping in to guarantee about a fourth of all mortgages sold in the past year. As of the second quarter, about 50% of all first-time buyers had a mortgage insured by FHA.”
By the way, I have no doubt that at its core FHA mortgages are a great program. Unfortunately, there is not much in the mortgage world that the foolishness of the housing bubble can’t drag down with it.
Related Articles:
Mortgage Delinquencies a Set New Record
The Brewing Trouble at the FHA
Pinto: The FHA Needs a $54 Billion Bailout
Catastrophe averted, personal bankruptcies skyrocket
Underwater Mortgages Drive the Next Foreclosure Wave
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