Is There A Problem Looming With FHA Loans?

This is a chart (click to enlarge) that HousingWire published a couple of days ago. It’s generally interesting but I’d like to focus in on one particular issue.

The chart shows loans rolling from current status to 30 days delinquent on a monthly basis. There’s a lot of fluctuation month-to-month caused by a host of things. For instance, tax refunds in the early part of a given year will tend to suppress the percentage as borrowers have extra funds to apply to their mortgages.

You will note that the roll rate spiked in November 2008 which isn’t a big surprise (you remember what the world was like then don’t you?) and then the roll rates decreased pretty significantly in the first part of the year before starting back up again in March. I suspect, but can’t prove, that a lot of the decrease was due to refinancing and loan mods. Borrowers on the edge were able to either cure or defer their immediate problems with new loans.

What I did want to point out, though, is the increase in the roll rate for FHA loans (purple line). It shows some of the same characteristics as the other product types — a spike in November and then a down trend — but look at the pace of the increase in roll rates since March. It’s almost as fast as subprime and certainly worse than any of the other types of loans.

That would be a concern in and of itself but FHA isn’t dealing with a lot of legacy loans. Remember less than a year ago it was an afterthought. The agency was barely a factor in the market. When the world changed its originations shot up as for awhile it was the only game in town. So, FHA is sitting on a pile of new loans, presumably prudently made, that might be expected to show some deterioration due to the economic climate but not to the extent that we’re seeing in this graph.

I’ll be honest, I haven’t any good explanation as to why FHA loans appear to be behaving so poorly. The cynic in me says that they’ve been shoveling money out the door without regard to proper lending standards but I’ve no proof. Whatever the cause, the result is of some concern. FHA is lending lots of money right now. Let’s hope they aren’t perpetuating the disaster.

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