What does the FHA foreclosure inventory really mean?

by Peter G. Miller
May 23rd, 2011
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If you’re interested in buying a U.S. Department of Housing and Urban Development (HUD) home, now might be the time. Combine low FHA loan rates with stagnant prices and large inventories and the opportunities in some markets have become interesting.

As of February, the FHA held title to 68,801 homes. These are homes financed with FHA mortgages that were then foreclosed. The number is up substantially from 39,998 properties held by the government in October 2010, according to HUD.

FHA critics cite the number of homes FHA holds title on as evidence that the program is somehow failing and should end. This is nonsense.

Inside the numbers

Overall, HUD has 6,933,260 insured home mortgages outstanding as well as 530,930 insured reverse mortgages outstanding. That’s 7,464,190 loans. In other words, fewer than 1 percent of the loans insured by HUD have wound up in government inventories. Given the down market we have faced since the April 2007 peak, it’s amazing that the numbers are not worse.

Critics feel that FHA loans are somehow “iffy” because they only require 3.5 percent down. The down payment requirement is not much of an issue. If it were, then surely a lot more homes would be held by the government.

Falling Prices

The problem is falling prices, which left many home buyers with few options in a down economy.

Consider:

Mr. Smith buys a home for $250,000 in April 2007. The property is financed with an FHA-insured loan for $241,250. In 2011, Mr. Smith loses his job and is foreclosed. According to the Federal Housing Financing Agency (FHFA), home values have declined by an average of 18.6 percent nationwide since April 2007. As a result, the Smith property is now worth $203,500. Even if Smith put down 15 percent, there would have been a loss.

Rising Prices

Now, imagine if home prices had simply risen by the rate of inflation over the past four years. Mr. Smith’s property would now be worth $271,177.57. That’s more than $30,000 above the outstanding balance for the FHA loan. (The loan balance at 6 percent would be 228,257.34 after four years.)

In a market with rising prices, it would be easier to sell a distressed home. In fact, the term “rising prices” suggests more demand in the marketplace and thus more homes would sell at auction and fewer properties would wind up in the HUD inventory.

The growing number HUD properties are not evidence of a FHA loan program gone bad. Rather they are evidence of a marketplace that’s been undermined. Like everyone else, HUD is a victim.

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