Souring FHA Loans

Well, that didn't take long. In November, BusinessWeek had a big cover story on the way in which dodgy subprime lenders were moving into the formerly safe-and-boring world of FHA loans. And now the shoe is dropping:

In the past year alone, the number of borrowers who failed to make more than a single payment before defaulting on FHA-backed mortgages has nearly tripled, far outpacing the agency's overall growth in new loans, according to a Washington Post analysis of federal data.
Many industry experts attribute the jump in these instant defaults to factors that include the weak economy, lax scrutiny of prospective borrowers and most notably, foul play among unscrupulous lenders looking to make a quick buck.
If a loan "is going into default immediately, it clearly suggests impropriety and fraudulent activity," said Kenneth Donohue, the inspector general of the Department of Housing and Urban Development, which includes the FHA.

Annoyingly the WaPo story can't find space in almost 2,300 words to ever tell us the rates at which FHA loans are souring: we're told that the immediate-default rate has "nearly tripled", for instance, but we're not told the absolute default rates. The closest we get is this:

More than 9,200 of the loans insured by the FHA in the past two years have gone into default after no or only one payment, according to the Post analysis.

I haven't been able to work out where the FHA reports the total number of loans that it originates; the best thing I've found so far is this chart, showing FHA originations rising from about 60,000 a month in January 2008 to over 140,000 in August. So very roughly I'd guess that over the past two years the FHA has insured about 2 million loans. If that's the case, then the immediate-default rate is about 0.5%. But some hard numbers would be very welcome here.

Comments

[pitchingpen...:]

Felix,

Twas ever thus. What's old, is new again. The same increases in first payment defaults accompany major market disruptions ala the S&L problem in 89-92. Although typical reasons such as illness, death, job loss, and divorce will account for a small number of first payment defaults, the majority will stem from borrower fraud. Many will involve a Builder, Realtor,Appraiser, Title Co., and perhaps a Loan Officer. You might also find that there is a concentration of condo/townhomes as corelated property type. The borrowers will typically be Straw Buyers with all the required fake/stolen documents and verification sources. The natural thing is to blame the Lenders and Brokers here, but most won't try to defraud the Federal government, they want to keep their jobs. What we need to remember is - Professional criminals are just that - Professionals. That's their job. They do what they do.

Mar 09 11:13 AM

[mister d:]

the fraudsters ran out of places to defraud and had to turn to FHA. These bankers just cant stop what they area doing. I have wonderd for quite some time if we might just experience minor corrections as opposed to the major trends we see in real estate if lenders would simply follow the rules. You take the fraudulent loans out of the portfolios and the mess is much easier to clean up. The funny thing about it is that these loans are easy to spot with basic underwriting. Unfortunately underwriters are forced to approve loans to meet quotas. I suggest an article. www.fiercefinance.com/...

Mar 09 12:28 PM

[blasted:]

What do you think is going to happen when you only have a .035% cousion on an asset that takes 7% to market in a flat market. FHA is a joke that only works in a market with 3% to %5 appreciation a year. Also when you originate to distrubute you are going to have a lot more problems than if the originators are eating their own cooking. As long as the banking queen is picking up the tab who cares about messes. Lenders were not so wrong back in the day when any less than under a 20% LTV was considered flakey.

Mar 13 09:38 PM

[joe33:]

Good post, thanks for the advice.

Apr 23 02:55 PM