New wave of foreclosures coming?

The FHA tried to prop up the housing market, but it might have caused more foreclosures in the process. With video updates.

By Kim Peterson Feb 2, 2010 1:14PM

Home-buying guide © Ingram Publishing / SuperStockFor the past year, the Federal Housing Administration has backed home loans that most big lenders wouldn't touch.

The FHA has helped people get loans who otherwise would be in a pickle as credit markets have dried up. But at the same time, the FHA has insured loans for people who couldn't afford them and has artificially propped up the housing market.

Now the FHA's woes continue to mount. About 9% of FHA borrowers have missed at least three payments (up from 6.5% a year ago), and experts say that means a new wave of home foreclosures is coming, according to The Washington Post.

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The problem is that the FHA asked for as little as a 3.5% down payment for a home purchase (lenders like JPMorgan Chase, for example, turned their nose at anything less than 20%).

And the FHA allowed sellers to pay for some of the down payment as well, meaning buyers had no "skin in the game," as the Post puts it (that policy has ended). So it was especially easy for buyers to walk away.

Bottom line? In its efforts to keep the housing market going, the FHA might have inadvertently caused a new crush of foreclosures.

The FHA is not a lender, but it insures lenders when mortgages go sour. And it's had to pay out so much that its cash reserves are dangerously low -- far lower than the mandated minimum.

Things have become so bad that the FHA is expecting to pay out on one out of every four loans made in 2007, the Post reports. That's the worst rate in decades.

But things are looking up for the FHA. The lenders working with the agency became pickier last year, giving loans to people with higher credit scores. The hope now is that those loans won't have such a high default rate.

And the FHA is finally asking for higher fees from borrowers as well as for a minimum 10% down from borrowers with low credit scores.

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