FHA Foreclosure Homes Rising due to High-Risk Loan Defaults
FHA foreclosure homes have been rising in number largely due to the delinquencies by high-risk borrowers who took out loans in 2007 and 2008.
These borrowers had credit scores lower than 600, but the FHA still insured their loans or refinanced their loans to respond to calls from policy makers to guarantee loans as private lenders started to reject loan applications during the last months of 2007 and first months of 2008.
According to the FHA, it started tightening its credit standards after many of the mortgages it had guaranteed in 2007 and 2008 have defaulted.
Brian Montgomery, who worked as commissioner of the FHA until July, said that legislators called on the FHA to refinance problem loans to save homeowners from foreclosures. The FHA has predicted that 24 percent of all home loans insured by the FHA in 2007 will default and that 20 percent of all loans guaranteed in 2008 will also default.
Because of these high levels of expected FHA foreclosure homes, analysts said that the agency may need to be rescued by the federal government soon. According to an FHA annual audit, the projected reserves of the FHA have fallen below the level set by the federal government and may need infusion of federal money. FHA officials however insisted that the FHA has adequate capital and that it can withstand projected losses from foreclosures.
The expected drop in FHA reserve levels has sparked debates about the policy of lending with low down payments just to stimulate the housing market. In many of the country’s struggling housing markets, the FHA has been guaranteeing 50 percent of all home loans being made.
Loan refinancing has also been battering FHA over the past 3 years. Based on a report from First American CoreLogic, defaults on refinanced mortgages have increased faster than defaults on house purchase loans.
In 2007, the percentage of loan applicants with credit scores lower than 600 had increased from 30 percent during the previous year to 37 percent, according to analysts at LPS Applied Analytics.
Now, according to FHA, it has been accepting better home loans as lenders implemented their own stricter lending standards since last year. With average credit scores for FHA borrowers climbing up to about 690, officials hope to reduce the pace of FHA defaults.
Additionally, the Justice Department has also filed a mortgage fraud lawsuit against Lend America, which it charged with causing a large number of FHA foreclosure homes.
