Loan Modification

What The FHA Headlines Don?t Say

By Peter G. Miller

There are a lot of people out there who just hate FHA loans. What bothers them is the idea that the federal government has been competing with private lenders since 1934. It’s socialism, they scream. And look at how lousy the government is doing — have you noticed that FHA defaults are soaring, they ask?

For some, of course, the real issue is a little different. The government has helped many entry-level borrowers gain home ownership through the FHA program and that’s an affront to those who believe that if you can’t get a downpayment gift from Dad that you have no right to buy a house.

The idea seems to be that the FHA should be held to a perfect standard while lenders in the private-sector should not. After all, if we had an honest accounting of the damage done during the past few years by “affordability” loan products, stated-income mortgage applications and underwriting standards which were apparently non-existent then a lot of folks would spending time in the Madoff suite at some nearby federal jail.

Now, finally, we have some real numbers from the FHA.

Speaking before Congress last week, newly-installed HUD Secretary Shaun Donovan had this to say:

“As is the case with other mortgage market participants,” said Donovan, “currently FHA is experiencing elevated defaults and foreclosures and with it, losses that exceed prior estimates. In contrast to the subprime sector, where unsafe loan features and poor underwriting made those mortgages risky from the start, for FHA, the primary reason for defaults and foreclosures continues to be loss of income combined with low or negative home equity, economic factors present in today’s environment. Although this is a challenging time for all entities in the mortgage market, FHA is unlikely to face the catastrophic losses borne in the subprime sector. FHA loans continue to substantially outperform subprime loans: only 7 percent of FHA loans are seriously delinquent (greater than 90 days delinquent or in foreclosure) compared to more than 23 percent of subprime loans.”

As to why there are objectively more FHA defaults today the answer is obvious: There are
more FHA loans.

Let me explain: Suppose in one year you have 500,000 FHA loans and a 7 percent delinquency rate. This means that 35,000 loans were at least 90 days late. Suppose the next year you have 1,500,000 FHA loans and 50,000 loans are delinquent. Since 50,000 is more than 35,000 it is a fact that “more” loans are delinquent.

However, this is an example of a fact without context. The context is that the program in the second year of our example is vastly larger than the first year. If losses were proportionate, there would have been 105,000 delinquent loans in year two.

This is not mathematical junk, it is reality. James Lockhart, director of the Federal Housing Finance Agency (FHFA) said last month in Washington that “From 1997-2003, Fannie Mae?s and Freddie Mac?s market share of mortgage originations gradually grew to almost 55 percent. From 2004-2006, the private mortgage market predominated, and Fannie?s and Freddie’s business sank pretty dramatically, with their market share dropping below 35 percent. Then as the private market started to freeze up in 2007, Fannie?s and Freddie’s market share took off?up to 73 percent in 2008. However, as you will note, that is a larger share of a much smaller market. The market share of mortgages insured by FHA/VA (Federal Housing Administration/Veterans Administration) has risen much more dramatically, from 3 percent in 2006 to 20 percent for 2008, but even more startling, to 35 percent in the fourth quarter of 2008.”

The argument here is not that the FHA does everything right, but that the ongoing efforts to kill off the FHA program and block entry-level borrowers from coming into the housing market is stupid and self-destructive. Given the huge inventory of unsold homes we ought to welcome any program that gets more folks in a buying mood.

Full post as published by FHA Mortgage Guide on April 06, 2009 (boomark / email).