Bank Foreclosures Homes Worsening FHA Cash Reserve Woes

by Peter Vernon on Foreclosures

Bank foreclosures homes have been worsening the cash reserve problems of the U.S. Federal Housing Administration.

Based on FHA records, the percentage of FHA-backed mortgage borrowers in default by at least 90 days as of December last year has soared to around 9.1 percent, a sharp jump of 40 percent from 6.5 percent in December 2008.

Although the number of FHA homes has been increasing over the past months, the substantial rise in default percentage in December showed the severe difficulties being experienced by FHA-backed homeowners. Records show that most of the FHA mortgages getting into distressed situations now were those taken out in 2007 and in 2008.

According to analysts, if the default rate continues to grow, the FHA will experience a severe cash problem and would have to ask assistance from the federal government for the first time in its history. All through the decades of its existence, the FHA had always used its fee income to cover its losses from foreclosures.

In October and in November last year, the FHA had to pay the costs of bank foreclosures homes by 47 percent more than what it paid in the same months in 2008.

To cut down its foreclosure and cash reserve problems, FHA Commissioner David Stevens launched a campaign against banks with high rates of FHA defaults and instituted stricter qualifying rules and higher fees for borrowers. He estimated that the increased fees would yield $5.8 billion in fee income for fiscal 2011, a substantial increase from only $2 billion in 2010.

Last year, the FHA banned 268 lending institutions from providing FHA loans and suspended six other companies, including Lend America and Taylor Bean & Whitaker, which subsequently collapsed and closed.

In his recent report to a U.S. House panel, Stevens said that aggressive lending schemes offered by mortgage banks in 2007 and in 2008 led to record numbers of defaults in FHA-backed loans. The FHA is expected to pay foreclosure claims on one of every four home loans provided to borrowers in 2007.

In another report, foreclosure specialists at Heavy Hammer and predicted that the FHA will dominate the foreclosure sector in the coming years, with a 41-percent share of foreclosure homes by 2018. They contend that FHA homes, together with Fannie Mae, Freddie Mac and VA homes foreclosures and other government-owned homes, will ensconce the federal government into the whirlpool of bank foreclosures homes for years.