Home sales have been stabilizing, mortgage interest rates remain at rock bottom, and some regions of the country are even seeing home price growth. Yet there remains at least one disturbing sore spot in the housing market: the rising number of FHA-backed mortgage delinquencies.
The Federal Housing Administration stepped in to make loans to many of the nation’s lower-income and first-time home buyers during the past several years as private lender fled the scene. It seems, however, that there was good reason to lenders to turn the other way – FHA-insured loans now have one of the fastest rising delinquency rates.
During the year ended March 31, the number of loans backed by the FHA that were 90 days or more jumped 27 percent and foreclosures were up 17 percent, according to federal regulators.
Compare that to loans backed by government-sponsored mortgage companies Fannie Mae and Freddie Mac that have seen a 15 percent decrease in delinquencies and 6 percent decline in foreclosures during the same time.
The comparison to bank loans is even more dramatic. Mortgage bank loan delinquencies plummeted 39 percent and foreclosures sank 10 percent.
So why are FHA-insured loans performing so poorly? Mostly because of the delinquent loans were lower quality loans to begin with. When Fannie, Freddie, and private lenders beefed up their lending standards in the wake of the financial crisis, FHA-backed loans remained relatively more loose. A down payment of only 3.5 percent is required, and during the past several years that kind of equity could be swallowed up in one month of falling home prices. That has left many FHA borrowers quickly underwater on their mortgages.
The FHA has tried to create better quality loans in the past few years. Starting in 2009, the agency started requiring insurance premium fees as well as creating a minimum credit score for its applicants. Larger down payments are now required for borrowers with credit scores below 580 and sellers are no longer allowed to assist borrowers with down payments.
“We expect the new books will continue with their better performance, primarily because of the steps that were put in place,” said an FHA official as quoted in a CNN Money article. “And we are benefiting from having more high-credit borrowers.”