As the Federal Housing Administration rapidly increases its role in the mortgage lending business, it's starting to face a growing number of foreclosures. While in 2006 the FHA's market share was just 2.7 percent, now that the subprime market is just about dead, the FHA has picked up the slack and its market share reached 23 percent in the second quarter of 2009. The FHA and Veterans Administration combined now back 40 percent of all home sales.
With the growth in market share comes a growth in delinquency rates as well because the FHA has taken on riskier loans to fill the gap left by the disappearing subprime lenders. Foreclosures rates inched up to 1.76 percent in June from 1.6 percent a year ago. Delinquency rates jumped to 6.88 percent up from 5.57 percent a year ago. And the number will likely increase rapidly. About 7.8 percent of FHA loans at the end of the second quarter were 90 days late or more, or in foreclosure, according to the Mortgage Bankers Association.
The Wall Street Journal reported Friday that these new mortgage-related losses put the FHA in danger of seeing its reserves fall below its Congressional mandate and may result in the FHA needing a taxpayer bailout. While no one is offering 0-percent-down loans with no documentation, FHA is offering loans with just 3.5 percent down. Other lenders look for 20 percent and some will accept 10 percent down from people with excellent credit histories.
That low down-payment rate was a recipe for disaster as home prices continued to fall. Many people who took FHA loans in the last three years could be facing underwater mortgages because home prices have fallen more than 3.5 percent. As job losses continue to mount, why would someone facing economic difficulties try to keep a home that is worth less than the money owed on it?
FHA is required by Congress to maintain a reserve level of at least 2 percent of loans. If the FHA falls below that level, it would need to pull back on lending. We won't know for sure where the FHA stands until it prepares a report when its fiscal year ends September 30, but some analysts believe it's dangerously close to its minimum reserve level.
Last year the estimated value of the reserve fund was $12.9 billion or around 3 percent of all FHA-backed loans. The fund is fed by FHA insurance payments collected at the time an FHA loan is closed.
Clearly Congress needs to keep a close watch on FHA's funding needs. While the meager housing recovery doesn't need another set back, do the taxpayers need yet another government agency that must be bailed out?
Lita Epstein had written more than 25 books including The 250 Questions You Should Ask to Avoid Foreclosures.