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FHA Defaults: Many More on the Horizon

Written By Brian Hicks

Posted February 2, 2010


duct tape


Here is a story that should interest you….

Because when this one finally comes tumbling down the taxpayers will be on the hook for every single penny of it.  You see, those awful subprime loans never really disappeared.  

Instead, these folks simply moved into FHA loans—which in most cases are nothing more than subprime deals with the backing of the federal government.

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 old limit was $417K). The funny thing is that we are expecting different results this time, which by definition is insane.

However, the cold hard reality is that the agency now expects defaults on 25% of all the loans they 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.

As for the FHA it looks like it’s only a matter of time now before it needs to be bailed out.

To that end, here is a great story on this unfolding debacle from Washington Post by Dina ElBoghdady and Dan Keating entitled: Rising FHA default rate foreshadows a crush of foreclosures

“The share of borrowers who are falling seriously behind on loans backed by the Federal Housing Administration jumped by more than a third in the past year, foreshadowing a crush of foreclosures that could further buffet an agency vital to the housing market’s recovery.

About 9.1 percent of FHA borrowers had missed at least three payments as of December, up from 6.5 percent a year ago, the agency’s figures show.

The FHA does not make loans but insures lenders against losses. And claims have already spiked. The agency had to pay out on 47 percent more loans in October and November than in the corresponding period a year earlier, according to an FHA report.

The number of loans in foreclosure, including those that have not yet been billed to the agency, has also increased. They were up 26 percent in the last quarter from a year earlier.

FHA Commissioner David H. Stevens, who joined the agency in July, flagged his agency’s troubles with the 2007 and 2008 loans in October, when he told a House panel that “rogue players on the margin” immediately migrated to the world of FHA lending after the subprime mortgage market collapsed.

Their aggressive lending tactics attracted borrowers with unusually poor credit profiles to the FHA. “That clearly impacted the books of business in 2007 and 2008, and that performance data is showing up very clearly in today’s balance sheet,” Stevens said at t

Adding to the trouble was a now-defunct FHA program that enabled sellers to cover the down payments of buyers. This meant many borrowers had no skin in the game and were more likely to walk away at early signs of trouble. The program resulted in excessive defaults before it was ended in late 2008, and it is projected to cost FHA an additional $10.5 billion in losses, Stevens said.

For all these reasons, the FHA projects that it will pay out claims to lenders on one out of every four loans made in 2007 — the worst rate in at least three decades. The claim rate should be nearly the same on the vastly larger volume of loans made in 2008.” (emphasis mine).

Of course the bigger problem here is that without FHA financing for the last three years the housing downturn would have been much worse at this point. Even still, all they have really done is kick the can a little further down the road.

Let’s face it, bubble gum and duct tape is the only thing holding this market together…..

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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