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FHA Mortgage Loans: Default Rates Fall in February

by Karen Lawson
March 23rd, 2010

FHA has been facing challenging situations related to its home loan programs since taking on most if not all of the mortgage lending market once served by sub prime mortgage lenders. Amid growing concerns about FHA reserves falling below legally required levels, FHA is preparing for more problems as its mortgage loans originated during 2007 and 2008 are in or will soon enter the most risky period for foreclosure. Mortgage loans most often fail during their second or third year. Against this backdrop of “doom and gloom,” we’ll share some potentially good news.

FHA Reports Declining Mortgage Defaults

As spring brings signs of life to housing markets, FHA loans three months or more delinquent have reached their lowest level since last summer. 4.8% of FHA home loans made since February 28 2008 were three or more months delinquent. Real estate markets are seasonally cyclical, with home sales typically increasing during temperate spring and summer months. As demand for homes increases, prices should stabilize, which may help homeowners suffering exaggerated losses in home value. Unfortunately, this scenario may not prevail in areas heavily plagued with foreclosures due to enormous crashes in home values.

Thinking Spring: Rejuvenation for Housing Markets?

With mortgage rates remaining near 5%, more buyers can qualify for home loans, and homeowners wishing to refinance can take advantage of FHA guidelines allowing for higher loan-to-value ratios; this can assist homeowners whose mortgage amounts exceed 80% of home value due to falling home values. Although FHA has taken on the job of ensuring that qualified moderate income borrowers, and borrowers with credit problems can buy homes, FHA does not make mortgage loans. It insures FHA approved mortgage lenders against losses on loans made according to its underwriting requirements. Recent increases in compliance audits and suspension of several rogue lenders have served notice that FHA will not tolerate lending practices incompatible with FHA guidelines. Heightened monitoring of lenders and strict enforcement of its lending programs are useful for finding and eliminating practices that jeopardize the solvency of FHA home loan programs.

Fewer Foreclosures: Great News for Homeowners and Communities

Everyone loses on mortgage foreclosures; mortgage lenders take losses on each foreclosed home, affected homeowners face credit problems for several years, and communities lose property tax revenue when blighted vacant homes and adjacent properties lose value. Foreclosed homes can attract crime which jeopardizes community safety and taps public safety resources.  If this slight dip in FHA mortgage defaults is a preview of recovering housing markets and mortgage lending activity, we’re all for it. Bring it on!

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