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FHA 's rising defaults spell trouble
A for sale sign is seen in front of a home in Miami, Fla.
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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.
FHA is a wonderful mortgage program. FHA is nothing like subprime mortgages. To get an FHA loan you had to QUALIFY. You had to prove yourself. You had to prove your income, assets and debts. Subprime was just a breathe on a mirror loan. The problem is not FHA qualifications it is that people are losing their jobs and if you lose your job it does not matter what kind of mortgage you have you are going to have problems. Keeping American jobs is the number one priority to keeping American homes. That is the problem not FHA guidelines. They are reasonable and you have to prove yourself to get the loan. It is the best mortgage around to help people who can afford it get a home and fulfill the American dream.
It's interesting to note that Mr. Henn appears to be saying that the trouble with FHA is broker fraud. He implies in this story (it's a story, not a report!) that once fraudulent brokers fled the sub prime lending market and headed to FHA lending. Yet he has not one shred of evidence offered to support this allegation. Could it be that the FHA is mispricing risk in order to offer a helping hand and HOME BUYERS are at fault here for not living up to their commitments? Could it be the only fraud here is on the part of the person taking out the loan? It's a little tiring to see all of the housing problems being blamed on fraudulent lenders. It appears to me that most of the fraud is from the media that continues to report these allegations with zero evidence.
Weed out bad brokers? That isn't FHA's problem. Offering a 4.875% rate for less than 4% down with a 620 credit score - now THAT is a problem. Conventional programs (Fannie Mae & Freddie) stopped offering these terms years ago. Why is FHA still pricing risk so wrong?
David Steinbrugge
Mortgage Broker
