Bad FHA Loans increase Foreclosure Rates
Recently the Department of Housing and Urban Development (HUD) released an audit of the Federal Housing Administration (FHA) done by independent actuaries. The audit revealed that the FHA’s Mutual Mortgage Insurance Fund (MMI Fund), which is a government backed fund intended to cover losses on bad FHA loans, actually has a negative value of $16.3 billion dollars.
The MMI Fund portfolio is worth more than $1 Trillion, but according to the audit the $30.4 billion balance is short $16 billion towards covering expected loses.
RealtyTrac, the nation’s leading provider for foreclosure information, points out that the independent actuaries state that this shortfall could result in the U.S. Treasury, read that…the U.S. taxpayer, having to bail out the FHA fund. If this occurs, and the independent actuaries believe it will, the bailout would be the first for the FHA in its 78 year history.
HUD Secretary Shaun Donovan says that loans made prior to 2010 pose the greatest risk with “fully $70 billion in future claim payments attributable to the 2007-2009 books of business alone.”
Data from RealtyTrac shows that foreclosure rates on FHA-backed loans that originated in 2007 and 2008 have jumped to more than 4 percent. This is the highest rate of increase for any foreclosure “vintage” in the last 12 years. At the same time the foreclosure rate on 2009 FHA-backed loans is around 2 percent, more than twice the rate of other loan types that year.
The HUD report states that it is taking steps to avoid any eventuality and is working to “shore up” the FHA’s financial position. There were different reasons given as to why the shortfall occurred, but the important issue is what is being done to rectify the problem.
HUD says, “foreclosures are expensive, for families, communities and the MMI Fund,” so they want to reduce the likelihood that these loans will end up in foreclosure.
According to the HUD report some of the preventative measures to be taken may include:
Sell pools of delinquent mortgages through the FHA’s Distressed Asset Stabilization Program. The purpose is to get the FHA loans off its books. The FHA still has a loss since the loan is being sold at a discount, but that discount has advantages. It gives “the new loan holder the margin to offer the distressed homeowner a sizable reduction in monthly mortgage payments, which will hopefully help that homeowner avoid foreclosure.”
Expand short sales so that distressed homeowners have a better way out of their financial problems. The FHA fund still looses, but with a short sale it is less costly, in most cases, than a full-fledged foreclosure.
Improve loss mitigation so that delinquent borrowers get payment relief directly through the FHA.
Streamline REO sales so that the FHA can minimize its loss in any foreclosure sale.