When the subprime market imploded and people starting rushing to FHA, the “chant” was that FHA is the new “subprime.” FHA originations skyrocketed and anyone who didn’t have a 700 credit score and a downpayment of 5 to 10% was quickly led into FHA. I remember reading statistics of different banks seeing a 150% jump in FHA loans.
At that point, I had a sneaking feeling that we’d start seeing some of the losses that hit subprime translating over into FHA. Well,guess what, we are.
The article cited below is about the fact that FHA is experiencing a substantial rise in what are called “Early Payment Defaults.” What does that mean? Substantially more of the newly originated FHA loans are having default issues than is typical.
What does that mean going forward?
- Increased losses for FHA
- Tightening underwriting guidelines for FHA loans.
- Higher fees and rates for FHA loans
Fannie and Freddie are already in trouble and now we’re looking at the first signs that FHA is heading for trouble too.
Interesting times….
Tom Vanderwell
The Next Hit: Quick Defaults – washingtonpost.com
The last time the housing market was this bad, Congress set up the Federal Housing Administration to insure Depression-era mortgages that lenders wouldn’t otherwise make.
This decade’s housing boom rendered the agency irrelevant. Americans raced to aggressive lenders, seduced by easy credit and loans with no upfront costs. But the subprime mortgage market has crashed and borrowers are flocking back to the FHA, which has become the only option for those who lack hefty down payments or stellar credit. The agency’s historic role in backing mortgages is more crucial now than at any time since its founding.
With the surge in new loans, however, comes a new threat. Many borrowers are defaulting as quickly as they take out the loans. In the past year alone, the number of borrowers who failed to make more than a single payment before defaulting on FHA-backed mortgages has nearly tripled, far outpacing the agency’s overall growth in new loans, according to a Washington Post analysis of federal data.
Many industry experts attribute the jump in these instant defaults to factors that include the weak economy, Read more