FHA Contributing To New Wave of Foreclosures?

For the past year, The FHA tried to prop up the housing market by backing home loans the most banking institutions would not lend too, but it might have caused more foreclosures in the process.

The FHA has helped people get loans who otherwise would not qualify as credit markets have dried up. But at the same time, the FHA has insured loans for people who couldn't afford them and has artificially propped up the housing market.

However, now, FHA's is joining the bad-loans club, as 9% of FHA borrowers have missed at least three payments (up from 6.5% a year ago), and experts say that means a new wave of home foreclosures is coming, according to The Washington Post.

The problem lies in the low down payment program offered by FHA for there borrowers, asking as little as a 3.5% down payment for a home purchase (lenders like JPMorgan Chase, for example, turned their nose at anything less than 20%).  Additonally, FHA allowed sellers to pay for some of the down payment as well, meaning buyers had no "skin in the game,".  Hence leaving FHA borrowers an easy exit and allowing them to walk away from the debt.

Bottom line? In its efforts to keep the housing market going, the FHA might have inadvertently caused a new crush of foreclosures.

The FHA is not a lender, but it insures lenders when mortgages go sour. And it's had to pay out so much that its cash reserves are dangerously low -- far lower than the mandated minimum.

Things have become so bad that the FHA is expecting to pay out on one out of every four loans made in 2007, the Post reports. That's the worst rate in decades.


Source: Washington Post  and NAR news
Kim Peterson on Tuesday, February 2, 2010 12:14 PM