Federal Housing Authority-insured loans that were 90 days or more delinquent jumped to 558,944 in January – a 62.1 percent increase compared to a year ago, according to a Feb. 19 CNNMoney.com report. In comparison, the number of loans that were 30- or 60-days delinquent fell over the past year. The surge has some industry watchers worried that the agency may need a bailout.
According to mortgage consultant Allen Hardester, aggressive originators pushed loan qualification requirement limits for risky borrowers in order to secure FHA backing after the subprime lending market ended in 2007. "They took advantage of lax underwriting by FHA to interpret the guidelines broadly," Hardester told CNNMoney.com.
Adding to the problem, the number of FHA loans has grown over the past three years since the housing meltdown from a small percentage of the market to around 40 percent of all loans. "There are a lot of young loans in the FHA book," Mike Fratantoni, a vice president at the Mortgage Bankers Association, told CNNMoney.com. "Mortgages typically hit their peak delinquency rates two or three years after origination."
However, Jay Brinkmann, MBA’s chief economist, said the increase in delinquencies may be a statistical glitch and not a trend. According to Brinkmann, lenders and servicers are reluctant to foreclose on homes that they think will be difficult to sell, which keeps some seriously delinquent loans in the 90-day category for a longer period. Moreover, many lenders are in the process of modifying loans for struggling homeowners, which also keeps loans in the 90-day category for an extended period.
While the FHA has not changed its policy on risk-based pricing for borrowers, the agency now requires a 10 percent down payment from borrowers with FICO credit scores of less than 580 as opposed to the 3.5 percent required from those with higher scores. Moreover, the agency has eliminated its seller-assisted down payment program that allowed sellers to kick back the down payment to homebuyers. "Given the environment, the FHA has made very responsible changes to its underwriting," Fratantoni said.
FHA Commissioner David Stevens said the agency’s finances are intact, including the fact that its primary reserve fund is at $32 billion, its highest level ever. However, the agency’s secondary reserve fund has fallen below its mandated level. To help boost its secondary reserve, FHA has recently requested that Congress allow it to increase the monthly fee it charges borrowers to insure loans.