Closer to a Bailout? FHA's Mortgage Delinquencies Soar

FHA mortgage deliquencyBy Tami Luhby

NEW YORK -- The mortgage market appears to finally be stabilizing -- as long as you ignore loans backed by the Federal Housing Administration.

Increasingly, FHA-insured loans are falling into foreclosure or serious delinquency, moving in the opposite direction of loans guaranteed by Fannie Mae and Freddie Mac or those held by banks, which are all showing signs of improvement.

And taxpayers could ultimately be on the hook for FHA's growing number of troubled mortgages. The agency's finances are already on shaky ground, and additional losses from loans going sour could prompt the need for a federal bailout, experts said.

"We can't escape this one," said Joseph Gyourko, a real estate professor at the University of Pennsylvania's Wharton School. "This is an arm of the U.S. government."

The share of government-guaranteed loans, a majority of which are backed by FHA, that were 90 days or more delinquent soared nearly 27 percent during the year ending March 31. Foreclosures jumped nearly 17 percent, according to a report published recently by federal regulators.

At the same time, bank loans saw a dramatic improvement, with delinquencies shrinking by 39 percent and foreclosures declining by nearly 10 percent. Fannie and Freddie's portfolio also improved as delinquencies dropped by nearly 15 percent and foreclosures slid by more than 6 percent, the quarterly report issued by the Office of the Comptroller of the Currency said.

FHA has also had a tougher time successfully modifying loans. More than 48 percent of government-guaranteed mortgages re-defaulted 12 months after modification, compared to 36.2 percent of loans overall, the report said.

FHA's Risky Borrowers

FHA doesn't make loans, but it backstops lenders if borrowers stop paying. With this guarantee in place, banks are more likely to offer mortgages to borrowers with lower credit scores or incomes.

Housing experts have been warning for years that many FHA-insured loans are not sustainable, especially in these troubled times. That's particularly concerning because FHA's share of the market has swelled in recent years as lenders pulled back on providing mortgages that weren't backed by the government.

One of the main critiques of FHA loans is that they require very low down payments -- a minimum of 3.5 percent. In an environment where home prices are declining, borrowers can quickly slip underwater and owe more than their property is worth.

"These are very risky loans," said Ed Pinto, resident fellow at the American Enterprise Institute, a conservative think tank. And loans made in the past three years are "moving into the beginning of the peak delinquency period and they are very big books of business."

Read the rest of this story at CNNMoney.

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