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Saturday, September 18, 2010

Revival of Easy Credit and Risk to the Economy

Is this another bad sign of things to come?  FHA is ramping up their loan machine again.  The FHA is a federal insurance agency that insures home loans for the banks against default.  The agency is supposed to use only the funds that it takes in from premiums for insurance (which is attached to FHA sponsored mortgage payments).  The following is a statement from the FHA's website on how they work:
FHA loans do not come directly from the FHA. Instead, the FHA is in the business of guaranteeing loans—reducing the risk to lenders and offering increased borrowing power to qualified applicants.
So how is the FHA funded, well here is a quote from the FHA site:
The FHA is not funded by tax dollars, but from the revenue generated by FHA mortgage insurance. 
In an article in IBD and Yahoo news it is pointed out that the FHA is taking on more loans and their underwriting requirements are more loose than Fannie Mae and Freddie Mac (hard to believe).
FHA-backed loans are by definition risky. They require only 3.5% down and are meant for first-time buyers who can't qualify for conventional loans.  In the last six months, FHA's share of the market has trended up, more so than loans backed by Fannie Mae and Freddie Mac. 
After going through 2007 - present, do we really need more risk entering the markets.  Mortgage defaults have already been rising toward the end of August - beginning September, per Realtytrac.  The number of foreclosures sold in July vs. June was down -73.77%, meaning we have a lot of inventory staying in the market.   New foreclosures in August vs. July was up 4.18%, bringing more inventory onto the market.  A stated reason for the number not being higher than 4.18% by some economists is because the banks and government simply cannot handle all the foreclosures coming in.

Pictures Courtesy of Realty Trac

Due to these and other economic events, it is predicted that home prices will fall further from here, making it possible for more homeowners to want to walk away from their under water mortgage.
And as FHA's volume of home purchases relative to Fannie and Freddie has continued to go up, its share of the mortgage market is at least 30% now.
What does this mean if a large portion of these mortgages default?  Up till now it has been stated that the FHA does not take money from tax payers to support its efforts.  If major defaults come, does this change or do they cut back on funding for the other areas of its operations?
FHA Budget Areas Courtesy of the FHA
In July, 75% of FHA's insurance volume was for home purchases vs. 59% in the six months ending in March. 
This seems like a dangerous path when defaults are rising, as it is easier to walk away from a mortgage that you put little to nothing down for.  It would seem we are positioning the FHA to require a bailout in the near term future.  [ Read more ... ]

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