FHA Delinquencies Raising the Specter for Further Market Turmoil

Once considered among the safest loans available, government-insured mortgages issued last year have performed worse than the subprime loans that kicked off the collapse of the nation’s housing market, according to mortgage data research firm First American CoreLogic

A huge level of defaults on loans insured by the Federal Housing Administration [FHA], which analysts called “stunning,” raise the specter of further market turmoil and more taxpayer funds sent toward fixing the mortgage crisis.

“Frankly, I wouldn’t be surprised if you called me up in a year from now and asked, ‘What do you think about the FHA bailout?’ ” said Norm Miller, a professor at University of San Diego’s Burnham-Moores Center for Real Estate.

First American CoreLogic….reported this week that 20.7 percent of all FHA loans issued in 2008 were at least 60 days late by 10 months after the origination date. By the same metric, 14.1 percent of subprime loans issued in 2007 were 60 days delinquent.

(An FHA loan allows for the refinance or purchase of a home with a low down payment (3.5% versus mortgages issued by private banks that require a minimum of 10% down payment). These loans are usually absorbed by first-time homebuyers.)

By definition, FHA loans carry little equity. But the risk of failure was increased by the implementation of “down payment assistance” programs implemented by home builders, said Ramsey Su, a San Diego housing analyst.

Those programs often covered the rest of the down payment and sometimes even covered the closing costs, meaning a homebuyer could borrow more than the value of the home and pay no money whatsoever up front.

“FHA became the subprime lender after the subprime market died,” Su said….The government has since discontinued the programs. [via NC Times]

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