FHA Mortgage Loan Defaults Rise

FHA refinance loans remain more flexible than conforming loans, but if the borrower defaults, the FHA insurance held by our government picks up the tab.  In a recent CBS article they profiled a New York City bus driver Steven Mitchell is two months behind on mortgage payments for a home loan guaranteed by Uncle Sam and part of a growing first-time home owner population at risk of foreclosure.   His home in the Far Rockaway section of Queens, New York, has a mortgage insured by the Federal Housing Administration, known as the FHA, which does not grant home mortgages, but insures them.

FHA mortgage volume has soared – quadrupling in the past three years. In 2006, 425,000 borrowers acquired FHA home loans.  This year, nearly half of all first-time home buyers in the U.S., a total of 1.8 million, used FHA-insured financing to refinance or make a new purchase.

Part of the appeal is the FHA allows a down payment as low as 3.5 percent of the purchase price.  “The current degree of FHA predominance in the market is unparalleled,” Department of Housing and Urban Development Inspector General Kenneth Donahue told Congress earlier this year. FHA is part of HUD.  

Mitchell has a monthly payment of $3,200, hefty for a bus driver earning $47,000 a year, but his brother and a friend who live with them were helping with the payments until they lost their jobs, leaving Mitchell juggling the household bills by himself.   “As long as everything was still being paid, everybody was doing a part, it could have been done,” Mitchell said.   Mitchell’s home is one of 5.5 million purchases or mortgage refinance loans worth a total of $696 billion currently insured by the FHA.

FHA forecasts it may pay out $27 billion over the next 30 years to cover expected defaults, leaving it with only $4 billion of its $31 billion cash on hand.  That would sink the FHA’s capital reserves below the congressionally-mandated two-percent of its loan portfolio, but the agency says no bailout is in the offing.  Read the complete > FHA article.