FHA, worse than subprime

It looks like the 2008 vintage FHA loans are turning out to be worse than those infamous subprime loans. I think the reason for this are obvious. All those down payment assistance programs meant the buyers were getting houses with NOTHING out of their pockets. No skin in the game means no fear of losing any money. The second most obvious reason is that these loans were primarily given to lower income working families. The families that are taking the brunt of the job losses.

From the North County Times

Once considered among the safest loans available, government-insured mortgages issued last year have performed worse than the subprime loans that kicked off the collapse of the nation's housing market, according to data from a research firm.

So far, government bailouts have put up to $2.9 trillion of taxpayer money at risk, according to the government official in charge of overseeing all bailouts.

A huge level of defaults on loans insured by the Federal Housing Administration, which analysts called "stunning," raise the specter of further market turmoil and more taxpayer funds sent toward fixing the mortgage crisis."Frankly, I wouldn't be surprised if you called me up in a year from now and asked, 'What do you think about the FHA bailout?' " said Norm Miller, a professor at University of San Diego's Burnham-Moores Center for Real Estate.

First American CoreLogic, a prominent mortgage data firm, reported this week that 20.7 percent of all FHA loans issued in 2008 were at least 60 days late by 10 months after the origination date. By the same metric, 14.1 percent of subprime loans issued in 2007 were 60 days delinquent.

The main problem with the delinquent FHA loans was low down-payment requirements, said Sam Khater, senior economist for First American CoreLogic.

While most mortgages issued by private banks now require at least 10 percent down payments, FHA loans allow borrowers to buy a home who put up just 3.5 percent of the cost.That means within two months of purchasing an FHA-insured home, the borrower probably owed more than the value of the home. And as layoffs mount, a loss of employment typically leaves the borrower in foreclosure or short sale ---- where the borrower resells and the lender settles for less than the amount of the loan.

"When you put out a (low down payment) product in the context of very high depreciation, it's going to happen," Khater said about the high delinquency numbers.By definition, FHA loans carry little equity. But the risk of failure was increased by the implementation of "down payment assistance" programs implemented by home builders, said Ramsey Su, a San Diego housing analyst.

Those programs often covered the rest of the down payment and sometimes even covered the closing costs, meaning a homebuyer could borrow more than the value of the home and pay no money whatsoever up front.

The government has since discontinued the programs. But before they did, FHA became the resource for riskier buyers, Su said. "FHA became the subprime lender after the subprime market died," he said.