Are FHA Delinquencies Going Down?
The Wall Street Journal reported on Monday that the FHA delinquency rate was slowing over the 2009 trend. They reported that only 8.5% of the loans in April were 90 days late vs. a high of 9.4% in January of this year. That is a lot like saying that last year our favorite sports team improving its record of losing 10 of the 11 games played vs. all 11 games lost the year before. The bottom line is the team still stinks. The housing market will continue to suffer due to a few fundamental factors.
First, low down payment loans are always risky. FHA has raised the threshold for the minimum credit score to obtain a FHA backed loan to 660 but buyers with stellar credit and little to no down payment will still walk away from the house IF they find themselves in difficult financial times, i.e. a job loss. The lenders of non FHA loans have tightened their standards and requirements for a loan much to the consternation of us in the Real Estate industry, but those buyers are less likely to default since they have lots of their own money into the home.
The second fundamental reason we have a troubled Real Estate economy, is that employers are still less likely to add to their ranks. Once job hiring becomes a routine event then this confidence will quickly move into the housing sector and we will see more than a glimpse of good news it will be here. But in this time of good news and bad news there is one thing we can do and that is to clearly look at the housing market with an unbiased view. Then and only then can we make really good decisions. For home owners who want to sell this is a good time. Yes you will sell your home for less than you thought, but you will also be buying for less too AND interest rates are so low that it seem silly not to make the move. We have seen an uptick in activity. Guess what? There is no tax credit. Savvy sellers know that they can sell their home now and buy a bigger or better home or for that matter downsize and do it all for less.
Posted by: 
Glenn Hanon
Krista Railey said
Jun 22, 2010 @ 11:45 PM
Loved the analogy and analysis. I will add that while there was a slight decline to April 90 day delinquencies, there were increases to the 30 and 60 day delinquencies and foreclosures. On a whole, the number of FHA delinquencies and defaults increased in April. As to the so-called default trend slowing, it is important to point out that in April 2009, there were 376,924 FHA loans that were seriously delinquent (90 days + late). In April of 2010, there were an astounding 553,028 loans that were seriously delinquent. According to my math, that is an increase of over 46%. Hardly what I would consider a lower trend. FHA and various agencies love to dazzle us with statistics without mention of the impact of dilution caused by new loan origination. The default and delinquency rates have been diluted due to new loan originations. Although FHA has been successful thus far at outrunning the default rates through high volume, the number of defaults have, for the most part, steadily increased. The reality is the FHA/HUD can't outrun them forever. I will, however, acknowledge that the number of 30, 60, and 90 day delinquencies did decrease in February and March 2010, reporting of special codes for FHA-HAMP related actions became mandatory. Although the number of FHA-HAMP related actions are supposed to be reported on HUD Neighborhood Watch, only a small handful of FHA-HAMP actions are showing on HUD Neighborhood Watch. Since FHA Commissioner Stevens claims there have been thousands of trial modifications extended, and May only showed 205 FHA-HAMP related actions, it raises the question of whether FHA-HAMP is temporarily skewing default statistics. The reality is that despite the so-called mortgage industry reform, HUD has still not revised FHA TOTAL Scorecard which is used by lenders to assess loans. FHA TOTAL Scorecard is famous for generating approval recommendations on loans with debt-to-income ratios exceeding 50% and layering of underwriting flexibilities. I have a slew of AUS/FHA TOTAL Scorecard findings which are clearly not investment quality. As a prior underwriter, and industry professional with over 20 years experience- I know underwriting and I know risk. As to those who insist that housing prices have stabilized, I openly laugh in their face. Rates can't go much lower, and are already out of alignment with risk. Furthermore, debt-to-income ratios are eventually going to have to be reigned considering that even borrowers with reasonable debt ratios are having a hard time making ends meet in this inflationary environment. Food inflation, tax increases, insurance increases, interest rate increases ad infinitum are piling up on the American consumer. The math says that housing deflation is not only inevitable- its a good thing. Again, good article and mindset.RSS feed for comments on this post
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