Banner Year for FHA Yields Increased Risk

It looks like fiscal 2009 will be FHA’s busiest year on record with one in four mortgages made over the last year being insured by the Federal Housing Administration. That’s a 50 percent increase with a count of 2.52 million loans.

Eighty percent of the FHA mortgages made for home purchases were to first-time buyers with low down-payments starting at 3.5 percent.

With the absence of subprime lenders, the FHA's market share grew from about 3 percent in 2006 to 23 percent this year. Also driving the numbers is the increased loan limits. The loan limit for FHA increased at the beginning of the year from $362,790 to $729,750 in some high-cost areas such as New York and Washington D.C.

But as FHA insures more loans, it is also assuming more risk. Defaults and foreclosures are up over last year. Mortgages 90 days or more delinquent are up 5.57 percent over last year.

With unemployment continuing to rise, the risk of default is very real although the borrowers are more solid than those receiving subprime loans in past years. Borrowers with FHA-insured loans now have average credit scores of about 690, compared with about 630 two years ago.

FHA also has tightened lending standards, requiring a 10% down payment for those with credit scores below 500.

Source: USA Today