Souring FHA Loans
Well, that didn’t take long. In November, BusinessWeek had a big cover story on the way in which dodgy subprime lenders were moving into the formerly safe-and-boring world of FHA loans. And now the shoe is dropping:
In the past year alone, the number of borrowers who failed to make more than a single payment before defaulting on FHA-backed mortgages has nearly tripled, far outpacing the agency’s overall growth in new loans, according to a Washington Post analysis of federal data.
Many industry experts attribute the jump in these instant defaults to factors that include the weak economy, lax scrutiny of prospective borrowers and most notably, foul play among unscrupulous lenders looking to make a quick buck.
If a loan "is going into default immediately, it clearly suggests impropriety and fraudulent activity," said Kenneth Donohue, the inspector general of the Department of Housing and Urban Development, which includes the FHA.
Annoyingly the WaPo story can’t find space in almost 2,300 words to ever tell us the rates at which FHA loans are souring: we’re told that the immediate-default rate has "nearly tripled", for instance, but we’re not told the absolute default rates. The closest we get is this:
More than 9,200 of the loans insured by the FHA in the past two years have gone into default after no or only one payment, according to the Post analysis.
I haven’t been able to work out where the FHA reports the total number of loans that it originates; the best thing I’ve found so far is this chart, showing FHA originations rising from about 60,000 a month in January 2008 to over 140,000 in August. So very roughly I’d guess that over the past two years the FHA has insured about 2 million loans. If that’s the case, then the immediate-default rate is about 0.5%. But some hard numbers would be very welcome here.
Update: Kevin Drum finds the numbers:
There were roughly 500,000 FHA loans originated in 2007 compared to 1.4 million in 2008.
In other words, the number of FHA loans has tripled in one year. And the number of instant defaults has tripled too. The amount of fraudulent activity appears to have held pretty steady at about 0.5% of all FHA loans.
Which would seem to put the front-page WaPo story into the "extremely misleading" category. How much can we trust the WaPo assertion that growth in immediate defaults is "far outpacing the agency’s overall growth in new loans"? My guess is not much, especially given that the lead writer on this story, Dina ElBoghdady, has demonstrated herself to be quite innumerate in the past.
Reprinted from Portfolio.com