Government-backed loans with the Federal Housing Administration help borrowers who might look like a foreclosure risk. And the reality is many of them are.
But research out today from the pro-free market American Enterprise Institute suggests FHA foreclosures feed off each other.
Former Fannie Mae executive Ed Pinto found FHA foreclosures tend bunch up in certain urban zip codes. One spot in Chicago had a delinquency rate of 70 percent.
Pinto says empty homes lead to crime, dragging down property values. He calls it the “FHA effect.”
“You have so many borrowers in those zip codes that are being foreclosed that you get this cycle of foreclosure that goes on because of the concentration of high risk borrowers that FHA is putting into these neighborhoods,” he explains.
Lenders have started to loosen credit restrictions, which has helped the country inch out of the housing crisis. But Pinto says FHA mortgages need tighter rules. He suggests higher down payments or shorter terms so buyers don’t take on more house than they can afford.
Bettie Teasley Sulmers is with the Tennessee Housing Development Agency. Like many home ownership advocates, she says the answer is homebuyer education.
“We think that’s a powerful tool in preventing foreclosure, and we’ve actually had some research bear that out,” Sulmers says.
She points out that the foreclosure rate for loans made through her agency is down to 1 or 2 percent, even with some buyers putting down no money at all.
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