According to the Washington Post, data from the Federal Housing Administration (FHA) foreshadows a wave of foreclosures that have yet to hit the housing market. The FHA's default rate, which measures the percentage of FHA borrowers who have missed at least three payments, jumped to 9.1 percent in December. The rate in December 2008 was a third less, 6.5%.
The high rate of defaults reflects loans made in 2007 and 2008 that are just now beginning to go south. Many of these were subprime loans with adjustable interest rates that are now resetting to higher rates and minimum payments. The FHA projects that it will have to pay out claims to lenders on one out of every four loans made in 2007 and 2008.
The FHA did not issue these loans, but insures the lenders against losses. The agency collects fees for the loans that it insures, but it may find that its short-term losses exceed its reserves. If that is the case, the federal government will have to use taxpayer money to cover the losses, something that the FHA has never done in 75 years.
The FHA is scrambling to try to stabilize itself. It ended a program that enabled sellers to cover the down payments of buyers. The program is projected to cost the FHA $10.5 billion in losses. In 2009, the loans it backed went to borrowers with substantially better credit scores - the average score now is 690, up from 630 two years ago. The agency is rapidly banning and suspending suspect lenders from making FHA loans. It is proposing a rule to raise the amount of capital that banks must hold to pay the FHA for losses due to fraud from $250,000 to $2.5 million. And, it has developed much tougher rules for borrowers - higher upfront fees, higher required down payments for those with weak credit scores, and restrictions on the amount of money that sellers can pay toward closing costs.
Still, the FHA has dug itself a deep hole. Its reserves as of September 30 were $3.6 billion, down from nearly $13 billion a year before. That latest figure is only 0.53 percent of the value of all FHA single-family-home loans. Congress requires that the rate be no lower than 2 percent. The data only reflects the payouts that the FHA has made and does not project future losses, which may be great considering the high default rate that continues to rise.
Because the FHA plays such a huge role in the housing market, its continued struggles may signal that recovery is still well into the future.
