FHA Foreclosure Rate Below Prime

by Peter G. Miller
August 24th, 2009

In the latest quarterly report from the Mortgage Bankers Association it turns out that FHA loans have a lower foreclosure rate than prime mortgages, the gold standard of residential financing.

The seasonally adjusted delinquency rate in the second quarter for prime loans was 6.41 percent, 25.35 percent for subprime loans, 13.84 percent for FHA loans and 8.06 percent for VA loans.

The percentage of loans in the foreclosure process reached 3.00 percent for prime loans, 15.05 percent for subprime mortgage, 2.98 percent for FHA loans and 2.07 percent for VA financing.

Translation: FHA loans have a lower foreclosure rate than prime mortgages.

This report is enormously important because it comes from the industry’s main association and it rebuts claims that the FHA program is somehow faulty or faltering. Alternatively, you have to actually look at the full report to see what it says.

“We also saw a major jump in FHA foreclosures,” says Jay Brinkmann, the MBA’s Chief Economist. “The percentage of loans with foreclosures started, the percentage of loans in foreclosure and the percentage of loans 90 days or more past due are all records for FHA. While the foreclosure starts rate for FHA loans at 1.15 percent is lower than all other loan types with the exception of prime fixed-rate loans, the FHA percentages have remained low due to a large increase in the number of loans outstanding, the so-called “denominator effect”. If the number of FHA loans had stayed the same as a year ago and we saw the same number of foreclosures, the FHA foreclosure rate would be almost 1.5 percent.”

Of course, it’s equally true that if cows had wings they might be able to fly.

Private Versus Government Loans

You have to go down to the very bottom of the study to find the real news: Compared to the second quarter of last year,

___ The percentage of loans in the process of foreclosure increased 1.58 percent for prime loans and 3.24 percent for subprime loans. The rate increased 0.74 percent FHA loans and 0.74 basis points for VA loans.

___ The seasonally adjusted delinquency rate increased 2.48 percent for prime loans, 6.68 percent for subprime loans, 1.79 percent for FHA loans, and 1.24 for VA loans.

In other words, government loans — which are constantly criticized — are doing better than private-sector programs.

Importance for Borrowers

Given rising unemployment levels and a flailing economy it’s plain that a lot of borrowers are going to get into trouble. The question ought to be: Will my lender help me if I have problems?

Look at the numbers above and compare delinquencies to foreclosures. You can see that FHA loans have a high number of delinquencies but relatively few foreclosures. This is important because you want a mortgage where the lender’s first impulse is not to foreclose or to suggest a bogus loan modification program — most of which re-default after six months.

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2 Responses to “FHA Foreclosure Rate Below Prime”

  1. Clifford J. Treese Says:

    It is not so much about cows flying. If FHA had not taken up the failed burden of conventional lenders and insured all those additional mortgages, then one or both might things might have happened: (1) If the conventional market issued more mortgages, then their denominator would have been higher and/or (2) with fewer mortgages issued by any party, homeowners would be in even worse shape.

  2. Peter G. Miller Says:

    Cliff –

    Thanks. Alas, we have what we have. Why change only one factor if we’re going to play the “if” game? If more people had gotten FHA loans in the first place rather than subprime financing we also would not have today’s problems.

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