FHA-insured Loans, originated during the great depression by the Federal Housing Administration and are meant to secure lenders against defaulting borrowers. Whereas, they are also an answer to borrowers who have a less than perfect (below 720) credit score or are unable to handle a 10% – 20% down payment. All these traits of FHA loans quickly made them popular especially in the 2008-2009 financial climate.
In the year 2008, FHA loans have accounted for about 46 percent of all mortgage applications – almost half of all mortgages. In addition, Federal Housing Administration guaranteed 186,000 mortgages in June, 2009, a record number in its 75-year history.
In these days, individuals highly prefer them over conventional loans, since it only requires a 3%-3.5% down payment, while conventional loans entail a 10%-20%. However, interest rates on FHA loans are a little bit higher than conventional loans.
Some analysts pointed out that borrowers with FHA-secured loans now have an average credit score of 690, compared to 630 two years ago. In spite of this, a large number of borrowers are turning up late in their payments or even defaulting. Delinquent FHA loans, those 90 days or more late, jumped 62.1% in the past year to 558,944, or 9.4% of FHA loans, as of the end of January, according to agency statistics. The FHA, however, insists its finances are sound. Its loan portfolio actually performed better than most mortgage products, according to David Stevens, the agency’s commissioner.
FHA loans are still a better option for lower income individuals to purchase a home that they would not otherwise be able to afford. However, if the number of delinquencies increases with such a pace, it is possible that taxpayers will eventually have to bail out the agency. My question here is: How can the Federal Housing Administration work out a suitable strategy to reduce defaults and late payments, and maintain healthy equity/collateral ratios against lent money at the same time?
Tags: Federal Housing Administration, FHA Loans, home loans, housing market, Mortgage Industry, Mortgage Loans
I have been calling for an FHA crash/bailout for the past 2 years. Is there somoene @ Goldman Sachs I can speak to about Shorting GNMA/FHA loans?
Because the fundamental benefit and purpose of FHA loans is to assist borrowers who do not have enough cash for a large down payment, the bottom line is that you cannot maintain healthy equity/collateral ratios. However, if you weaken one principal underwriting criterion that makes lending safe (in this case requiring less down with FHA loans), the government could attempt to strengthen other aspects in order to decrease the number of defaults:
1) Increase Credit Requirements – The idea of affordability should only apply to income and wealth. However, somewhere along the line affordability became synonymous with weaker credit. The government could increase credit requirements as a first step.
2) Decrease Ability to Walk Away – In general, borrowers who put 10-20% down are less likely to walk away or default on a mortgage. Not only do they have a significant equity buffer when home values dip, but putting that much cash into a property is significantly difficult to walk away from (psychologically). Looking back at the profile of our borrowers who defaulted or filed for bankruptcy, they had nothing to lose except a temporary credit hit. The government could make a provision that borrowers who default on FHA loans a) have increased standards in order to file for bankruptcy b) are required to put down twice as much on future FHA loans.
3) Spouses Must Co-Sign – Too many times I’ve seen one spouse walk away from a loan (as the only guarantor) while the other spouse lines up financing to buy a cheaper property. In many cases that I’ve seen, they can afford the payments and simply don’t want to be upside down on a property. Because their income is strong enough to not qualify for a loan modification, the one spouse who signed for the loan just stops making payments. By requiring both to sign, the government can take away an “easy out”.
http://www.elitefinancing.com
“To be” rescued, I fear. We seem to have severe learning difficulties.
Rachel:
Based upon much of the data I have seen recently, I feel we will have to “rescue” FHA. The lending parameters are much riskier than in the past and there is pressure for them to make loans.
FNMA and FHLMC have seen the “fallout” for this type of pressure. It appears that the lack of jobs or the loss of jobs has been the driver for the high delinquencies.
If you have any questions or need additional information, please let me know.
Regards,
Kevin R Mullins
EVP & Chief Financial Officer
Monticello Banking Company
Monticello, KY
Twitter: http://www.twitter.com/krmullins1964
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