The Federal Housing Authority Might Be Fueling The Next Housing Bubble

Photo: Flickr / JefferyTurner

As reported by the NYT, a recent study has revealed a pattern of risky lending by the Federal Housing Administration that could trigger a spike in the agency’s foreclosure rates.This comes at a time when the agency’s market share of mortgages remains alarmingly high.

The study was performed by the conservative American Enterprise Institute, but there’s no evidence of bias – much of its findings were based of off F.H.A. estimates.

Here’s a chart which shows that the F.H.A.’s market share of mortgages, while off its 2009 peak,  remains above pre-recession levels:

FHA Mortgage Market Share By Loan Count

Photo: Business Insider, HUD

The NYT provides the reason behind this spike in market share:

While Fannie and Freddie have tightened their loan standards, the F.H.A.’s underwriting requirements have remained liberal. To receive F.H.A. backing on their loans, borrowers must have a credit score of at least 580 out of a possible 850, and they are required to put down at least 3.5 per cent. F.H.A. allows the borrowers whose loans it insures to have a monthly housing debt payment of around 30 per cent of their incomes. Still, 40 per cent of the 2010 loans in the F.H.A.’s insurance portfolio were made to borrowers whose total monthly debt payments were greater than 50 per cent of their monthly incomes or had a credit store of less than 660, the study found, a dangerous level.

The average credit score a F.H.A. borrower is only 699. In addition, 44% of the F.H.A.’s loans go to families with subpar incomes. As a result, the AEI projects foreclosure rates of 15 per cent for these loans, much higher than the average of 9.6 per cent projected by the F.H.A. 

The U.S. housing recovery has not only been supported by quantitative easing, but also by an increase in loans to borrowers who are more likely to default – in other words, by subprime lending.

Pinto recommends reducing mortgage terms to 20 years or place more restrictions on the overall debt load for insurable borrowers in order to mitigate the potential for default.

But even that may be too little, too late. The F.H.A.’s auditor recently estimated that its insurance fund antic pates $13.5 billion in losses, and the AEI’s study concluded that the rise in foreclosure rates could set the F.H.A. back another $20 billion.

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