FHA 's rising defaults spell trouble

A for sale sign is seen in front of a home in Miami, Fla.

TEXT OF STORY

Tess Vigeland: For potential homeowners who say they've had trouble getting a bank loan for a mortgage these days, the advice of the last few months has centered around three letters: FHA. Federal Housing Administration loans accounted for almost a third of all the mortgages issued in the last three months of last year. FHA loans have proven popular because of the low down payment required, sometimes as little as 3.5 percent. But as Marketplace's Steve Henn tells us, the agency is dealing with some of the same problems that plagued the subprime market.


STEVE HENN: The FHA announced today that delinquencies among loans it insures have shot up in the past year. And the number of loans in default increased by more than half a percent in just one month.

Guy Cecala is publisher of "Inside Mortgage Finance." He says the FHA could end up needing a $100 billion bailout before this recession is over.

Guy Cecala: All we can be sure of is that anybody who's involved in the mortgage market in a major way is going to see increased liability if not defaults down the road. That is just a given.

Cecala says it no surprise FHA's defaults are rising when the whole economy is tanking.

Cecala: It's not rocket science to figure that out. You increase your business when housing prices were declining and foreclosures were on the rise.

And it was inevitable that you'd get burned. But Brian Chappelle -- a former FHA employee who's now a consultant -- says the FHA is also doing a pretty bad job policing fraud and managing its risks.

BRIAN CHAPPELLE: That is the number one job that the new commissioner must get their arms around.

In the past two years, tens of thousands of mortgage brokers fled the subprime market and got licensed to make FHA loans. In 2005 the agency insured just 3 percent of all loans in America. Now it guarantees a third of all loans. Chappelle says the FHA is supposed to prop up the real-estate market in tough times.

Chappelle: Because if we didn't have the program the last two years we would be really in much worse shape.

But Chappelle says if the FHA doesn't start doing a better job weeding out bad brokers and stopping fraud it could be headed for trouble.

In Washington, I'm Steve Henn for Marketplace.

About the author

Steve Henn was Marketplace’s technology and innovation reporter for the entire portfolio of Marketplace programs until December 2011.

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