As More Seek FHA Loans, Delinquencies Rise

As the economy soured and credit tightened over the past two years, the Federal Housing Administration (FHA) has become an increasingly popular option for mortgage-seekers with limited resources and weak credit. Now, some fear the FHA could be headed for a financial crisis of its own.

The FHA is reporting rising rates of loan delinquencies at the same time that it's seeing a massive increase in its share of the U.S. mortgage market. The agency, traditionally known as the government's lender of last resort, now guarantees nearly a third of all new mortgages in the United States, up from merely two percent in 2005.

That combination has many fearing the FHA could require a government bailout of its own for the first time in its 75-year history.

Over 10 percent of all borrowers who obtained an FHA loan in the first quarter of 2008 missed at least two consecutive payments in the first ten months of the loan. Over 12 percent of all FHA loans made in 2007 were reported to be either in foreclosure or seriously delinquent. And the Washington Post has reported that the number of FHA loans in which borrowers defaulted without making a single payment has nearly tripled over the past year.

1.75 million FHA mortgages expected in 2009

Meanwhile, demand for FHA mortgages, which require as little as a 3.5 percent down payment, has soared. The agency is on track to approve 1.75 million new mortgages in 2009, up from only 425,000 in 2007, according to Meg Burns, director of the FHA Office of Single Family Program Development. A total of 670,000 FHA mortgages were approved in January and February alone.

Those numbers have led to concerns that the FHA, which is self-funded through the insurance premiums it charges, could require an infusion of taxpayer funds for the first time ever. However, officials of the Department of Housing and Urban Development (HUD), which oversees the FHA, say a number of factors make it less likely the agency will suffer a crisis similar to what the big private sector subprime lenders went through.

Officials point to moderating factors

First, the agency has typically focused its efforts on moderately priced mortgages, not the expensive properties in markets like California that have seen the most dramatic price declines. In addition, the FHA reports that relatively few of its delinquencies become foreclosures due to an aggressive loss mitigation program; it reports that only 10 percent of its mortgages delinquent for 60 days are eventually foreclosed, compared to 27 percent in the private sector.

In addition, a program that was responsible for a disproportionate number of foreclosures, in which sellers posted the down payment for buyers, was ended by Congress last fall. Also, the FHA has raised its insurance premium to help cover the cost of defaults. Charged when the mortgage is written, the premium was raised to 1.75 percent of the mortgage value from 1.5 percent previously.

The FHA doesn't actually make loans; it guarantees them for other lenders. It has traditionally focused on the subprime market of first-time homebuyers who lacked either the credit scores or down payment needed to obtain a mortgage by other means.

With credit flowing freely during the housing bubble, relatively few borrowers saw a need for an FHA-backed loan, given the ready availability of 0-down payment and subprime mortgage options available. But as those dried up, subprime borrowers increasingly have turned to the FHA.