Federal Housing Administration Facing Trouble As Foreclosures Rise

The Federal Housing Administration may have to tap into tax payer money for the first time in its history as foreclosures on FHA loans continue to mount. Foreclosures are expected to continue to increase and housing prices may shrink as stimulus measures expire. See the following post from Expected Returns.

From the Washington Post, Rising FHA default rate foreshadows a crush of foreclosures:

The share of borrowers who are falling seriously behind on loans backed by the Federal Housing Administration jumped by more than a third in the past year, foreshadowing a crush of foreclosures that could further buffet an agency vital to the housing market's recovery.

About 9.1 percent of FHA borrowers had missed at least three payments as of December, up from 6.5 percent a year ago, the agency's figures show.

Although the FHA's default rate has been climbing for months and eating into the agency's cash, the latest figures show that the FHA's woes are getting worse even as the housing market shows signs of improvement. The problems are rooted in FHA mortgages made in 2007 and 2008. Those loans are now maturing into their worst years because failures most often occur two to three years after a mortgage is made.

If the trend continues and the FHA's cash reserves are exhausted, the federal government would automatically use taxpayer money to cover the losses -- a first for the agency, which has always used the fees it charges borrowers to pay for its losses.

There is little doubt in my mind that foreclosure will rise in 2010. FHA backed loans are just one of the mechanisms by which the government is artificially supporting the housing market. While government-sponsored stimulus temporarily creates an artificial boom, sooner or later the free market dictates where prices will go. Watch for asset prices to tanks as stimulus programs expire one by one.

Souring FHA-Sponsored Loans

For now, just about every major measure of the agency's financial health is worsening.

The FHA does not make loans but insures lenders against losses. And claims have already spiked. The agency had to pay out on 47 percent more loans in October and November than in the corresponding period a year earlier, according to an FHA report.

The number of loans in foreclosure, including those that have not yet been billed to the agency, has also increased. They were up 26 percent in the last quarter from a year earlier.

FHA Commissioner David H. Stevens, who joined the agency in July, flagged his agency's troubles with the 2007 and 2008 loans in October, when he told a House panel that "rogue players on the margin" immediately migrated to the world of FHA lending after the subprime mortgage market collapsed.

Although lending standard for FHA-backed loans have improved recently. there is no question that the FHA has served as the "lender of last resort" for a multitude of potential homeowners. The effect of these irresponsible loans are just starting to be felt. 2010 will be the beginning of a slow grind down in housing that will be measured in years.

Projections of brighter economic conditions are based on presumptions and blind hopes of a recovery in housing that are unlikely. Remember, foreclosures aren't isolated events, as they negatively effect surrounding home prices. To put it simply, rising foreclosures and rising unemployment are not what recoveries are founded on. There is no recovery.

This post has been republished from Moses Kim's blog, Expected Returns.