If you look at what’s happening in the world of short sales, foreclosures and REOs you’ve probably noticed that not too many distressed homes are available through the FHA, a situation which may be on the verge of change.
One big reason we don’t see a huge number of FHA foreclosures today is because there are relatively few FHA mortgages to go wrong from the toxic loan years. The FHA program was shoved aside by loan alternatives which seemed a lot more attractive. Why get an FHA loan when you could qualify for more and buy a better home with an option ARM or an interest-only loan? And why submit a pile of paperwork when you could finance with a low-doc or no-doc mortgage application, something not allowed by the FHA?
Just take a look at the FHA’s market share in recent years: In 2001 FHA loans represented 13.75 percent of the market, a share which dropped to 6.4 percent in 2004. In 2005 FHA market share fell to 4.08 percent and then slumped to 3.77 percent in 2006. By 2007 the FHA’s command of the market rose to just 4.12 percent.
Now imagine that you got an option ARM in 2005 with a five-year start period. When would the new and higher payments begin? How about an interest-only loan originated in 2007 with a three-year start period? Borrowers with such financing would face vastly higher costs this year, a time when home values across the country have taken a beating in most markets. Indeed, the Federal Housing Finance Agency reports that home prices in February were 13.3 percent below the April 2007 peak.
In addition to a weak market share during the go-go financing years, the FHA has also benefited from something which has eluded many private lenders: It knows how to deal with delinquencies.
Figures from the Mortgage Bankers Association show that for the first quarter of 2010 the delinquency rate for prime fixed loans was 6.17 percent. This compares with 7.96 percent for VA financing, 25.69 percent for subprime fixed loans, 29.09 percent for subprime ARM loans and 13.15 percent for FHA loans.
As bad as the FHA delinquency numbers look — and they look woeful compared with prime fixed and VA financing — FHA borrowers are often saved from foreclosure.
In fiscal 2009, the government reports that “82.7 percent of the HUD-held loans that are 90 days or more delinquent were brought under control.” In other words, better than four out of five delinquent FHA loans are never foreclosed.
Now, however, we may be seeing the first signs of a coming FHA foreclosure surge. Why? Because this time the FHA is on the wrong side of the numbers game.
At a moment when unemployment remains high and home values remain depressed, the FHA is a marketplace winner — at least for now. According to FHA Commission David H. Stevens, FHA mortgages currently represent 20 percent of all refinance activity and 30 percent of all purchase money mortgage lending.
“The low market share which protected the FHA so well during the past few years has now been lost,” says James J. Saccacio, chairman and chief executive officer at RealtyTrac.com. “This means that without a stronger housing sector the FHA has more marketplace exposure than in recent years and thus an increase in FHA foreclosures lies ahead.”
The problem here is not that the FHA has done anything “wrong” in the sense of offering risky products or reducing standards. Instead, there are simply more FHA loans being made during tough times and the bigger number of loans will lead to more foreclosures, even if the foreclosure rate remains unchanged. In addition, if HUD cannot save delinquent loans from foreclosure at current rates then the number of FHA foreclosures could increase significantly.
In fact, to reduce its risk the FHA has raised its down payment requirement from 3 percent to 3.5 percent. It’s increased the up-front mortgage insurance premium from 1.75 percent to 2.25 percent. In addition, the central FHA mortgage insurance reserve — the FHA Mutual Mortgage Insurance Fund — saw funding grow from $27.2 billion at the start of fiscal 2009 to $30.7 billion at the end of the year, a 4.5 percent reserve against loans outstanding.
Unfortunately, neither the FHA nor anyone else in real estate has the power to reduce unemployment levels or raise home prices. For now there’s nothing the FHA can do but bulk up reserves, tighten standards and hope for better times ahead.
For buyers and investors, the expected rise in FHA foreclosure numbers simply represents a new and growing set of opportunities, opportunities which in some cases may be the best real estate bargains in town.
Peter G. Miller is syndicated in more than 100 newspapers and operates the consumer real estate site, OurBroker.com.