FHA foreclosures jump as modified loans default
Down payments as low as 3.5% for borrowers
Washington The number of Federal Housing Administration-insured home loans entering foreclosure jumped in March after half the mortgages it modified to ease repayment terms were in default again a year or more later.
The FHA's role in lending to first-time buyers with poor credit and limited cash expanded after the 2008 collapse of the mortgage market put it at the centre of government efforts to revive housing. The FHA allows down payments as low as 3.5 per cent for borrowers with a credit score of 580, below the 640 defined as subprime by the Federal Reserve.
"The credit standards are way too loose — you can get into a house with very little skin in the game, and if home prices drop by a small amount, you're underwater," said David Lykken, managing partner at Mortgage Banking Solutions, an Austin, Texas-based consulting firm. "We've got to start getting reasonable about standards. What they've done so far, some very slight attempts at tightening, doesn't really count."
An increase in FHA foreclosures may lead to further demands for stricter standards that could shut buyers out of the property market as it shows signs of stabilising after a six-year slump. Mark Calabria, director of financial regulation studies at the Cato Institute in Washington, in a February report called for Congress to tighten the agency's lending qualifications to protect taxpayers, who insure the loans. First-time homebuyers accounted for 33 per cent of real estate sales in March, according to the National Association of Realtors.
Treasury study
Borrowers with mortgages for homes bought in 2010, the FHA's peak lending year, now owe almost seven per cent more than their homes are worth if they used the minimum down payment, according to S&P/Case-Shiller home price index data. That year, the agency insured 1.1 million loans to purchase single-family homes, more than four times the total of 261,165 in 2007.
Lenders initiated foreclosures on 36,400 FHA-backed mortgages, twice the number in April 2011, according to Lender Processing Services. The increase for Fannie Mae and Freddie Mac loans was 13 per cent, the Florida-based mortgage data company said.
