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Travis Torcoletti

FHA Loan Default Rates Skyrocket

Monday, July 9, 2012 - Article by: Travis Torcoletti - Ikon Financial Group - Message

Increasingly, FHA-insured loans are falling into foreclosure or serious delinquency, moving in the opposite direction of loans guaranteed by Fannie Mae and Freddie Mac or those held by banks, which are all showing signs of improvement. And taxpayers could ultimately be on the hook for these mortgages...again. With finances already on shaky ground and additional losses from loans going sour could prompt the need for a federal bailout according to industry experts.

The share of government-guaranteed loans, a majority of which are backed by FHA, that were 90 days or more delinquent soared nearly 27% during the year ending March 31. Foreclosures jumped nearly 17%, according to a report published recently by federal regulators. This comes at the same time that bank loans saw a dramatic improvement, with delinquencies shrinking by 39% and foreclosures declining by nearly 10%. Fannie and Freddie's portfolio also improved as delinquencies dropped by nearly 15% and foreclosures slid by more than what gives?

Put simply, FHA backs very risky borrowers. Remeber that FHA only insures loans, it does not issue them, so with this guarantee in place, banks are more likely to offer mortgages to borrowers with lower credit scores or incomes. Housing experts have been warning for years that many FHA-insured loans are not sustainable, especially in these troubled times. That's particularly concerning because FHA's market share has swelled in recent years as lenders have pulled back on mortgages that weren't backed by the government.

Back in 2009 FHA said that it would shore up its standards and finances and they have taken some measures to correct what they were doing by increasing insurance premiums, raising the minimum credit score (still too low if you ask me) and disallowing assisted down payments etc. but clearly the problem is still...well, a problem. So get ready to foot the bill for yet another bailout America.

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