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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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.
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.
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.
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.
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.
I just secured my FHA loan with Intercontinental Capital Group in New York. I heard they may be adjusting the standards to get an FHA loan and I qualify now, so I didn't want to wait any longer no matter how much rates drop. I don't have the down payment for a regular loan. With FHA, I'm only paying 3%. And my rate's not bad for my credit. If you want an FHA loan, better go get it.
Gotta tell ya – as a RE investor, I love doing FHA deals. I mean, seriously who has 20% to put down in this market? Certainly not first time home buyers. The flip side of the coin however is, we got into this mess because of buyer's lack of SKIN IN THE GAME.
I'm afraid that FHA is creating the same 800 pound gorilla. Seriously, does anyone think that a homeowner who puts up 3% to get in a home is truly vested in keeping that home, even when times get a little rough?
Love my FHA buyers but I hate to think of what's gonna happen when times get rough for these folks. It will be de ja vu, all over again
Craig Fuhr
scary possibility as the self employed stated loans went away about two years ago and fha stepped in as the low cost option, and now ever tightening lending requirements is pinching and creating a bottleneck in real estate sales. I may not be able to buy a house even though I’ve never had a default and over twelve mortgages, I’m concerned that there may not be many options soon.
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