FHA Sees a Rise in Loan Default Payouts

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Feb 09 2010

The rate of borrowers behind on their loan payments on loans that are insured by the Federal Housing Authority rose by over a third last year, according to the Washington Post.

This figure could mean that there is more trouble ahead for the government agency. As more home go into foreclosure, the FHA must increase payouts on claims to housing lenders.

It has been known for some time that the default rate has been climbing, but recent numbers indicate that they are getting worse. This worsening comes despite signs of improvement in the housing market. According to the Washington Post, “those loans are now maturing into their worst years because failures most often occur two to three years after a mortgage is made.”

The Washington Post report also states that, through December of last year, 9.1 percent of those with FHA-backed loans had missed at least three payments. This figure rose from 6.5 percent at the same time in 2008.

These heightened rates could present serious challenges to the Federal Housing Authority’s cash in reserve. Typically, the agency generates its own income through proceeds from mortgage insurance that is paid by the homeowners. If this cash reserve runs dry, however, then tax dollars would be used to pay claims to lenders.

Those at the FHA believe that the losses will begin to abate, however, as bad loans go off the books. The agency also announced that they will have higher fees for borrowers, which could generate up to almost $6 billion in 2011.

For now, the FHA has had to pay out almost 50 percent more in insurance claims to lenders in late 2009 than it did the year previous.

The FHA is a governmental organization that provides mortgage insurance on loans made to lenders that it approves. The FHA provides this insurance on loans for single family and multifamily homes.

When a borrower defaults on a loan, the FHA will pay out a claim to the lender. In this way, the lender is not as restricted in the loans that they can offer.

With over 34 million homes insured since it was created in 1934, the FHA is the largest mortgage insurer in the world.

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