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FHA Could be At Risk

By Sally Maison
Published: Monday, December 7th, 2009

Bus driver Steven Mitchell works hard just to keep up with his financial obligations, but it was not enough to stay current with his mortgage payments for a home loan secured by the federal government. He is among the fast-growing number of first time homeowners who are on the verge of foreclosure, and who are on their way to losing huge points on their credit score. But experts fear that homeowners are not the only ones who will be affected by mortgage defaults.

FHA Could be At RiskMitchell is still trying to hold on to his home, saying it is very embarrassing to lose his house in Queens, New York. He is also aware of the damages a foreclosure could do to his credit score. His home is insured by the Federal Housing Authority, a government agency that secures, but does not issue, mortgages.

FHA loans have skyrocketed in a very short time, with its volume quadrupling since 2006. Three years ago, only 425,000 borrowers were granted FHA-backed mortgages. This year, 1.8 million first time homebuyers are secured by FHA, which is half their total number. The Housing Authority has attracted many consumers, especially those with excellent credit score, to apply for a loan because of the low 3.5 percent down payment. The federal tax cut for first time homebuyers is also credited for the increase.

Kenneth Donahue of the Department of Housing and Urban Development remarks that FHA is unparalleled in the housing sector, currently insuring 5.5 million purchases or refinances which totals to $696 billion.

But analysts worry about the 8.5 percent of those loans that are delinquent or about to reach foreclosure. They note that it is higher than the national average of seven percent and is way above the traditional two percent seriously delinquent loans for FHA.

FHA Commissioner Dan Steven says he is finding a way to keep FHA funds intact since they are the last agency supporting the housing market on its own. He explains that the Housing Authority does not ask for taxpayer’s or congressional subsidy for funds.

One of the moves he made to minimize risk is raising lending standards, such as increasing the minimum required credit score for borrowers. As of late, the average credit score of FHA-secured borrowers is 693, which is 60 points higher than its average two years ago.

Congress is also doing its part to prevent FHA loan defaults, banning lenders from asking down payments from FHA-backed borrowers. Meanwhile, the authority itself has limited the amount homebuyers could borrow from them.

Federal Housing officials say they are doing their best to avoid draining funds so they can support the market should the economy fluctuate anew.

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