Lisa Simpson
Nov 16,2009
In: Bank Foreclosures

The FHA is Getting Cornered as Defaults in Loans Increase

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The FHA or Federal Housing Agency is getting cornered into an uncomfortable position as defaults on loans increases. The agency has been keeping alive the sick housing market during the past one year. The federally insured loans that it advances is now accountable for a third of all the new mortgages – ten times more than the numbers of only few years previously.
There are problems in its loan programme. Although its share in the market has considerably grown so has the number of defaults on these loans. To explain away the situation FHA is now referring to other lenders whose rates of default are higher. There are in the market about 900 modest to small lenders whose default rates are very high.

Guy Cecala who publishes Inside Mortgage Finance said, “The FHA business has been like a magnet for smaller lenders looking to carve out niches in loans that have lower down payments and slightly lower underwriting requirements.”
FHA loans present little difficulties. Only 3.5% down payment is required and the credit score eligibility is flexible. It makes Cecala reminiscent on past sub-prime mortgages. He said, “In the current mortgage market environment, where we kind of have plain vanilla mortgages, there’s not a lot of opportunity for the small ‘entrepreneurial’ company who wants to make a niche for themselves in the mortgage market," Cecala says. "FHA is one of the only avenues still left.” Once upon a time loan taking was as easy as breathing. But all that is history. But looking at some of the advertisements it is difficult to believe this.

Premium Capital Funding otherwise known as Topdot in an advertisement said, “We’re authorized by the federal government to offer FHA loans to homeowners with less than perfect credit … and your credit score may not even be a factor.”Reliable data has shown that the loans granted by Topdot over the previous two years have defaulted about two and half times more than the national average. In some instances borrowers are known not to have remitted even a single payment.

David Stevens the Commissioner of FHA has said that a rate like that is “very bad”. He did not specify particular firms but he said any lender of FHA whose rate of default is over 150% than the norm is problematic. He explained, “An institution that has that high a compare ratio is something that would be very concerning to me and would be one that we’re looking at more closely going forward. And if they don’t perform at the levels we would expect and that the taxpayers would expect, we need to make sure that they either improve or they get out of the program.”

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