The Brewing Trouble at the FHA

Brian Hicks

Updated September 18, 2009




In case you ever wondered what happened those awful sub-prime mortgages, you will be happy to know that they are now being unwritten by the Federal Housing Administration.

In fact, the FHA is responsible for 23 percent of all new loans this year, up from just 3 percent in 2006.

That’s the good news.

The bad news is that these new borrowers are pushing the program to the brink with default rates rivaling those that killed sub prime.

And oh by the way, since it is already a federal program, the taxpayers are going to be on the hook for every penny of it.

Here’s the story on the brewing debacle by the AP.

It’s in a story by Alan Zible entitled: Gov’t home loan agency faces cash squeeze

“The Federal Housing Administration said Friday that its financial cushion will sink below mandatory levels for the first time in its 75-year history, but officials insisted the agency won’t need to be rescued.

“Under no circumstance will any taxpayer bailout be needed,” said David Stevens, the FHA’s commissioner. He also said the agency doesn’t expect to raise fees for borrowers, or curtail the number of loans it insures.

Amid the collapse of the subprime lending market, the government has taken up the slack. The FHA has insured nearly a quarter of all new loans made this year, and about 80 percent of that business is from first-time homebuyers.

But the agency has faced mounting concerns on Capitol Hill that it will soon need a taxpayer bailout. As of this summer, about 17 percent of FHA borrowers were at least one payment behind or in foreclosure, compared with 13 percent for all loans, according to the Mortgage Bankers Association.

Plummeting home prices, Stevens said, are the main reason its financial reserves are dwindling. While an earlier analysis had assumed prices would hit bottom this year, the agency now is assuming prices will fall through next spring.

“While FHA didn’t take part in the housing boom, it’s not immune from the ripple effect of declining house prices,” said Brian Montgomery, the agency’s former commissioner. “That’s quite frankly what this is about.”

The agency itself does not make loans, but rather offers insurance against default. Many borrowers are willing to pay for the insurance because FHA loans only require down payments of 3.5 percent of the purchase price.

The FHA now insures about 5.3 million mortgages, up from about 4 million three years ago.”

It’s not going to be pretty when this one blows up.  

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