18 June 2009

Another Bubble in the Making - FHA Backed Loans

It looks as if another bubble is being teed up, this time in Federal Housing Administration (FHA) insured loans. The government’s eagerness to pick up the slack in mortgage lending will almost certainly saddle tax-payers with massive losses in the not too-distant future.

One has to wonder just how the government can feel that insuring loans with extremely low fees is good business when the private won’t touch them (at least not with the cut-rate insurance prices FHA charges)? The massive expansion in FHA backed loans is nothing more than another misguided government effort to stimulate the economy, and prevent a further deterioration in asset values. Unfortunately, such efforts only serve to prolong and deepen the depression by blowing still more bubbles, which inevitably lead to more defaults and foreclosures.

Already we are seeing defaults in FHA backed loans spike, with a tripling in the number of so-called “instant” defaults, where not a single payment is ever made on the mortgage. Far from leading the mortgage industry to a new era of prudent lending and risk management, FHA is doing its best to take on as much risk as possible, and plug the holes left by the loss sub-prime lending.

The simple fact is that US housing is still vastly over-priced, and things aren’t going to turn around until either incomes start increasing or prices fall to the point where housing is once again affordable.

Record-high demand for government- backed home loans is overtaxing the Federal Housing Administration and may weaken the integrity of Ginnie Mae mortgage bonds, a U.S. inspector general said.

The freeze in the mortgage markets has driven FHA’s market share to 63 percent this year, from 24 percent in the fiscal year ended Sept. 30, Donohue told a House Financial Services Committee panel on Oversight and Investigations.

The volume of single-family mortgage loans insured by FHA, which is overseen by HUD, more than tripled to $180 billion in 2008, he said.

With the surge in new loans, however, comes a new threat. Many borrowers are defaulting as quickly as they take out the loans. 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.

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. The pace of these instant defaults has tripled in one year. By last fall, more than two dozen FHA home loans on average were defaulting this way every day, seven days a week.

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