FHA Delinquency Rate Now Above 14%
Get Ready for The Mother of All Bailouts

Earlier this week, David Hogberg filed an important story at Investors Business Daily:

FHA-insured loans have more than tripled from 530,000 in fiscal year 2007 to 1.7 million thus far in 2009. The Government National Mortgage Association, which securitizes FHA loans, has boosted its mortgage-related issuance to $287 billion from $85 billion. Yet during that same period, the FHA’s loan delinquency rate has climbed to 14.4% in Q2 from 12.6% two years earlier.

In other words, 1 in 7 FHA borrowers are behind on their payments, even as the federal mortgage-guarantee agency has increased its market share to 23%.

Furthermore, FHA offers loans with as little as 3.5% down payment — e.g., $10,500 down on a $300,000 home. With the housing market slumping and unemployment at 9.7%, the FHA’s low-down-payment loan policy “was a recipe for disaster,” as Lita Epstein of Daily Finance explains:

Many people who took FHA loans in the last three years could be facing underwater mortgages . . . As job losses continue to mount, why would someone facing economic difficulties try to keep a home that is worth less than the money owed on it?

The problem with a low-down-payment loan is that, with less of his own money at stake, the borrower who falls behind on his payments in the first few years of the mortgage is more likely to walk away and let the bank take the house back.

With even “prime” borrowers now feeling the housing pinch, we’re almost certainly heading for a new wave of foreclosures — further depressing an already flat market — leaving banks stuck with a new glut of FHA-backed homes they can’t re-sell for enough to cover the loan balance. Friday the Wall Street Journal did a big story on the problem, with this scary quote:

“They’re probably going to need a bailout at some point because they’re making loans in a riskier environment,” says Edward Pinto, a mortgage-industry consultant and former chief credit officer at Fannie Mae. “I’ve never seen an entity successfully outrun a situation like this.”

Get ready for The Mother Of All Bailouts!

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