Is There a Problem Looming with FHA Loans?

This is a chart (click to enlarge) that HousingWire published a couple of days ago. It’s generally interesting but I’d like to focus in on one particular issue.

click to enlarge

The chart shows loans rolling from current status to 30 days delinquent on a monthly basis. There’s a lot of fluctuation month-to-month caused by a host of things. For instance, tax refunds in the early part of a given year will tend to suppress the percentage as borrowers have extra funds to apply to their mortgages.

You will note that the roll rate spiked in November 2008 which isn’t a big surprise (you remember what the world was like then don’t you?) and then the roll rates decreased pretty significantly in the first part of the year before starting back up again in March. I suspect, but can’t prove, that a lot of the decrease was due to refinancing and loan mods. Borrowers on the edge were able to either cure or defer their immediate problems with new loans.

What I did want to point out, though, is the increase in the roll rate for FHA loans (purple line). It shows some of the same characteristics as the other product types — a spike in November and then a down trend — but look at the pace of the increase in roll rates since March. It’s almost as fast as subprime and certainly worse than any of the other types of loans.

That would be a concern in and of itself but FHA isn’t dealing with a lot of legacy loans. Remember less than a year ago it was an afterthought. The agency was barely a factor in the market. When the world changed its originations shot up as for awhile it was the only game in town. So, FHA is sitting on a pile of new loans, presumably prudently made, that might be expected to show some deterioration due to the economic climate but not to the extent that we’re seeing in this graph.

I’ll be honest, I haven’t any good explanation as to why FHA loans appear to be behaving so poorly. The cynic in me says that they’ve been shoveling money out the door without regard to proper lending standards but I’ve no proof. Whatever the cause, the result is of some concern. FHA is lending lots of money right now. Let’s hope they aren’t perpetuating the disaster.

Comments

[Ben Witmer:]

Part of the problem is borrowers can get into a home with only 3.5% down on the sales price and thats it (and that can even be a gift). The seller can pay all the closing costs (up to 6% of the salesprice which usually covers all closing fees and escrows for taxes and insurance). HUD is not requiring monthly payment reserves in case the borrower gets laid off, gets hurt and is out of work or incurs some other financial stress. In some cases, the 3.5% down is ALL they have. No safety net is a big problem. In addition many of the people getting FHA mortgages tend to be lower on the socioeconomic scale and are blue collar workers. This leads to higher percentages of layoffs, firings, and injuries which can have a dramatic impact on income.
I have many suggestions that could make FHA mortgages better performing and help our current multiple real estate issues, but they appear to have their head in the sand.

Jun 28 10:56 AM

[Loan Survivor:]

I agree with Ben's comments, but will add that much of the delinquncies are tied to straw buyers associated with real estate investors.

Many RE investors used subprime loans to flip their properties. Now they're using FHA. They gift the borrower the 3.5% down payment, pay their closing costs, even do credit repair to cram buyers into a property so they can turn a profit.

A lot of this is done with fake paystubs, W-2's and falsified gifts. These straw buyers make a few payments and then default.

Even if the buyer's intent is to make the payments, they're often set up poorly to succeed. Many of them are obviously failing at being responsible homeowners.

Jun 29 09:08 AM

[rm:]

I'm seeing a lot of FHA streamline refi's that are going bad now.

In these cases, the servicers saw a borrower who was having difficulty, moved them into a refi hoping to reduce their rate a bit and buy them a payment holiday.

They were in the early stages of distress, and things haven't gotten better.

In addition, FHA and VA loans are not eligible for the Treasury mod program, so any borrower who's had a substantial income decrease is not going to get much in the way of payment relief.

Ben is correct that no safety net is a BIG problem. They're not going to address that issue any time soon, because then you'd REALLY see a decline in lending.

Jun 29 10:08 AM

[Bruce Krasting:]

FHA (Federal Home Loan) is part of FHFA. There are three legs to the FHFA. Fannie Mae, Freddie Mac and the Federal Home Loan Banks. Fannie and Freddie are of course in receivership. The receivership deal put caps on the portfolio size of the Agencies. Those limits were being bumped up against so FHFA decided to ramp up Home Loan Bank lending. I think it has been growing about $100b per month of late.

You see the endless commercial on tv re this. The flood gates are open. FHL banks can lend up to 97.5% of a home purchase. And that is what they are doing. And that is why the default rate is jumping. When you make high LTV loans the default rate goes higher. This is very predictable and therefore you must assume that this is a policy choice by FHFA leadership. We will pay for this as usual.

Jun 29 10:22 AM

[vvvvviking:]

Simple, as Ben said, FHA is where all the garbage loans are going, there is no other outlet in this market. It is the next subprime, and of course the taxpayers will be on the hook to save it.

Jun 29 10:26 AM

[IMWatchingU:]

The facts are simple. As an American, you do not have the right to OWN a home. Life choices and social status should limit a purchase such as this just as one would with regards to a yacht.

Take a look at the cash for clunkers program. Most people are driving those clunkers because THEY CANNOT AFFORD A NEW ONE.

When food, gas, and utility costs go through the roof with Cap n Trade, more people will be renting. We have to start facing the facts here.

Jun 29 11:49 AM