Why We Might See Another Housing Slowdown if FHA Loans Blow Up
When the mortgage companies were writing loans to anyone with a pulse, you rarely saw an FHA loan being written. Even in 2006 only 2.7 percent of loans were FHA.
But when credit tightened and lenders backed away a funny thing happened. FHA loans skyrocketed up to 23 percent in the second quarter of 2009. All is well and good except that the FHA loans are going bad, quickly. With 9.7 percent unemployment and a tough economy, FHA loans are defaulting at a quickening rate. And if the FHA reserves cross the 2 percent reserve level, currently at 3 percent now, the spigot may get turned off.
That means 27 percent of originations, and these are not the top level loans to begin with, could be in jeopardy. The alternative is a bailout from the federal government and that is not very politically palatable right now.
So we have the potential to see the ending of the First time homebuyer exception disappear and a tightening or complete loss of FHA lending happen at the same time.
Scary stuff for a fragile real estate market.
In the past two years, the number of loans insured by the FHA has soared and its market share reached 23% in the second quarter, up from 2.7% in 2006, according to Inside Mortgage Finance. FHA-backed loans outstanding totaled $429 billion in fiscal 2008, a number projected to hit $627 billion this year.
Rising defaults have eaten through the FHA’s cushion. Some 7.8% of FHA loans at the end of the second quarter were 90 days late or more, or in foreclosure, according to the Mortgage Bankers Association, a figure roughly equal to the national average for all loans. That is up from 5.4% a year ago.
Resulting FHA losses are offset by premiums paid by borrowers. Federal law says the FHA must maintain, after expected losses, reserves equal to at least 2% of the loans insured by the agency. The ratio last year was around 3%, down from 6.4% in 2007. via WSJ.com.
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Comment by sfvrealestate on 5 September 2009:
I’m a Realtor here in So. Cal. and here’s what I see going forward. Although FHA mortgages were extremely popular in Spring ‘09, we’re now seeing less and less of them. Why? I think it’s because conventional loans are now obtainable with 10% down. I also think that FHA loans are wildly unpopular with sellers — and with all the bidding wars we’ve been seeing, buyers either know better than to try to win with one, or else they’re sitting on their hands.
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Comment by Gainesville Foreclosures on 8 September 2009:
I hope nothing blows up later this year. I am expecting inventory to increase in Florida in the Fall. But the inventory trend is still down.
Pingback by Weekly summary of real estate news, Memphis comments, and other interesting stuff – September 9th | Memphis Real Estate Buzz on 9 September 2009:
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Comment by Bill Williams on 22 October 2009:
So when are the banks in California going to release the 90,000 plus foreclosed properties? How long will they be allowed to keep these properties hidden from the buyers? This bidding war is completely unfair to legitimate families who are looking for decent homes in decent neighborhoods.
Comment by Joel Carson on 30 October 2009:
Thanks for the information. Despite all of the frustrations and harships, it’s great that Realtors and others in the real estate industry are thinking and rethinking the way we do business. This dialogue is good. Let’s keep it up.
Comment by Joanie on 13 November 2009:
I really hope they don’t do away with FHA loans. I have used FHA for every home I’ve ever financed. Two years ago I financed my home in New Jersey with Intercontinental Capital Group and was able to finance 97.775 of the total cost of my house. It’s a shame that a few irresponsible people can ruin it for everyone.