The FHA insurance fund dropped 39% in 2008 from the previous year. I previously posted the concern that perhaps the FHA would require its own bailout. Now FHA insiders reports that since March, the FHA loans are becoming 30 days or more delinquent almost as fast as sub-prime loans. Sub-prime defaults are no longer news, but the FHA delinquencies are happening at a faster rate than any of the other types of loans.
FHA home loans allow borrowers to buy a home with only 3.5% of the sales price as a down payment (and that can be a gift). The seller can pay all the closing costs (up to 6% of the sales price which usually covers all closing fees and escrows for taxes and insurance). HUD does not require monthly payment reserves in the event the borrower gets laid off, gets hurt and is out of work or incurs some other financial stress. In some cases, the 3.5% down is ALL they have. No safety net is a big problem. In addition many of the people getting FHA mortgages tend to be lower on the socioeconomic scale and are blue collar workers. This leads to higher percentages of layoffs, firings, and injuries which can have a dramatic impact on income.
When you make high loan to value ratio loans the default rate rises. This is very predictable and therefore you must assume that this is a policy choice by FHA leadership. We will pay for this as usual.