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FHA Defaults on The Rise

According to an article on CNBC.com, "7.46 percent of FHA-insured loans were "seriously delinquent", up from 6.16 percent a year earlier."

Additionally, FHA foreclosures, "totaled 39,687 in January, up 22 percent from the same period last year."

Here is the problem, despite all of the efforts by the Fed and Congress to "stimulate" the housing market through loan modifications, foreclosure moratoriums, first time home buyer tax credits, and ridiculously low mortgage rates, the housing market is no better off than it was last year. In fact, based on these FHA delinquency numbers as well as an estimated 11.18% of all mortgages being at least 30 days late, an argument could be made that the housing market deterioration is only accelerating.

The systemic problem is that there is not enough demand to absorb the number of foreclosures that are sitting on the market that continue to drive down property values.

I have used the analogy several time before, and it still is true today, the levees have been breached and the city has been flooded. Rather than pumping the waterout of the city so that more damage is not done to the existing homes and infrastructure, the government is waiting for the water to evaporate while at the same time they are spending literally over a trillion dollars trying to repair a levee system that is still under 10 feet of water.

Posted by Mark MacKenzie on 04/07/2009 08:18 PM

Comments (34)

FHA Defaults on the Rise in the ActiveRain Channel

its the housing market stupid, fha, delinquency

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34 Comments on FHA Defaults on The Rise

APR

No surprise. As unemployment increases, so do mortgage defaults.

Mark:

Thanks for the statisitcs, interesting perspective that you have. Not sure we are seeing the same thing here in Florida, though. We are blowing through inventory at a faster pace than what you are quoting, my guess is your numbers are national. Our March sales were the busiest in years and many were first time homebuyers!

It isn't over yet. Even when the water evaporates there will be pollutants left everywhere the high water has been.

Lenn: This housing recession has more layers than a cat has lives. The hits just keep on coming.

Charles: In Phoenix we are seeing the same thing, inventory has been moving. The majority of the data I write about is national. What we are seeing is as CA, Phoenix, Las Vegas, and some markets in FL begin to improve, the rest of the housing markets are actually beginning to deteriorate as a result of the economy. The one thing I have learned over the past couple of years watching the market is that things continue to be in flux.

Sabrina: Agreed. Negative equity is going to remain a very real systemic threat to the housing market for an extended period of time.

But on the plus side, someone will turn that lightbulb on . . . in the house they just bought! There ARE buyers are there. A little leaner then years passed. But they are there.

Mark, the government isn't serious about dealing with the foreclosure problem. The sum total of all their efforts won't save more than half the homes in danger.

Just when we were beginning to see some light at the end of the tunnel here in Florida CNBC slips us a Mickey, now I remember why I stopped watching the news.

I'm seeing the $8,000 first time homeowner's tax credit having an impact at the low end, but the high end is still stalled. We can't sell homes because there are no comparable sales at the high end and therefore no mortgages. It's a vicious cycle.

I am not surprised either. With the current economy, anything could happen.

I just finished a book on How To Sell HUD Homes because as the FHA delinquency number rises the number of HUD listings will as well.

Mark my broker told me a story last week. Seems a house he sold last year to someone who is employed and can afford it, is purposely letting it go past 30 days. That way he can qualify for the reduced interest rate? I don't really understand how it works. But this is the story. I wonder how many people are doing this?

If there was some serious concern they would increase the incentive much higher than the current $8k figure on a tax credit and apply it to all purchases.

Good in site .. I agree that its time to just let the natural flow of the economy work its way out of the mess at this point

I dont see this mess getting much better and working itself out until the unemplyment situation is resolved. If people don't have jobs forclosure's will continue to happen.

Mark, like you said the levees have been breached and the city's under water, but I don't think they're even trying to repair the underwater levees, they're boating in the Sierra club and paying them for studies on new schools of fish. In other words they don't have a clue.

Brian.

Carla: Agreed, there are millions of buyers out there. The problem is there is about one million too few of them to have a meaningful impact on the housing market.

John: Agreed, the banking system is the priority, not housing. But as many have pointed out, trying to fix the banks before the housing market is backwards.

Joe: The light at the end of the tunnel is a train. This housing depression has many levels and we are just now entering the "unemployment level."

Gail: In theory low end home sales stimulate high end home sales as homeowners move up. The problem is that the cycle is broken. Low end home sales are dominated by foreclosures in which there is no move-up buyer.

Huiting: You finish your book yet? :)

Nishika: For every crisis there is always an opportunity. :)

John Walters: I have heard about this before. It is my understanding though that based on Obama's housing plan that you do not need to be delinquent in order to qualify for the refinance so long as the LTV does not exceed 105% I believe.

Claude: I agree with you completely about this on the tax credits. Not surprisingly, I don't think Washington understands the gravity of the situation in the housing market. They continue to bring a knife to a gun fight.

Eric: I think that the government has spent an awful lot of money on the wrong things.

Lora: The problem is that we are in a negative feedback loop that is not easily broken. Housing, banks, credit, consumer confidence, and employment are all connected. In my opinion, you fix housing first and you do this by providing incentives for Americans to invest in real estate and absorb the excess supply of homes.

Brian: Very funny :) My point was that they are trying to fix the banking system and prevent foreclosures through loan modifications. The reality is that neither will work until you stop home value declines which will require stimulating demand to get rid of the excess inventory. What they are doing is backwards.

Another aspect that is rarely (if ever) mentioned is all the "shadow inventory" --- homes which have clearly been abandoned yet there are no yard signs or even a lockbox on the door. In some cases, banks aren't even taking legal possession to avoid being made responsible for HOA/city/county code violations.

Some of these homes have been sitting for months. My guess is that the real number of REOs would scare the bejeezus out of anyone paying attention.

Mark - I will take somewhat of a contrarian point of view. Sure, the economy in of itself can attribute to some of this, yet I saw crap being bought by investors "through FHA Guidelines" that would have had trouble going sub-prime back in the day. To boot, you had and still have folks who never were experienced in conventional and/or government lending getting into the game because it was the only game in town. Still is. And they don't know what they are doing, they just want to make money doing it. If that is Capitalism, it got too big... too sloppy.

While I don't mind the "I make a $100,000 a year from my bedroom while jerking the skirt to being an ebay phenomenon", we lost our way. Wealth isn't a lottery ticket, even if we are competing against those who hit the right numbers. This Industry needs less us and more them, except for those jokers who want no point loans. You can have them, but they will cost. They always will. Profit resides somewhere... always. Companies are like Churches, they don't work for free.

As you mentioned in a comment, I'm seeing inventory decreasing here in Orange County, CA even though prices have continued to decrease and defaults are up.

Here in South Florida, we're seeing a spike in the last 2 months. Primarily because of the REDC auctions. What most don't realize is that a majority of the purchases are investors, hence the inventory will be back on the market inside 90 days...then double digit losses in transactions. Back and forth here we go. Did I mention, people that are upside down on their newer homes...walking away because of Chinese Drywall and the builder has already filed bankruptcy????? Talk about a second round knock-out!

Interesting post. I checked out your profile, WOW. Leave it to me to argue with an expert. In Denver, CO we have hit the bottom. The low end is crazy and it's starting to creep up to other areas.

Hey Mark, More and more people are suffering from unemployment therefore, more and more houses will go into foreclosure. Simple math really. The manufacturing base built the middle class in this country. There will be further pain until we can replace those lost jobs.

APR

How old are the FHA loans that are in trouble? Are these loans made in the days of Jeremiah grants? Are these loans made before the crash? Or are these the people that bought 6 months ago?

Mark, I've noticed that you posts often talk about the downsides of things. I disagree with your perspective. Is the market tough yes, but I'm reading all across Active Rain how segments of the US are picking up. those seem to be broad numbers it would be interesting to see if the defaults are regonalized or the answers to some of Gene's questions above.

Mark - Housing prices continue to decline due to high inventories, foreclosure sales drive housing prices down in some areas to the point of over correction, a scarcity of buyers, world-wide recession, increasing unemployment, hundreds of billions in cash and trillions in loans and govt. gaurantees to shore up insolvent banks, Tarnished Assets on the books of major banks & financial institutions, state & local investment funds, mutual funds, & pension funds, low investor and consumer confidence in the markets and in the actions of our government can only mean that we have a long and difficult road ahead of us.

Mark,

I love analogies because they give people word pictures and yours are good ones. I agree with your sentiments and beliefs. So far the government has missed the mark, and by quite a lot. They are ignoring the bleeder -- the real source of the damage and are off on some peripheral matter mopping up blood over here in this messy place (saving the banks). And by the way, they have not accomplished much of anything there-- they will be "even more insolvent" next year as they are making toxic assets quicker that the government can sop them up and push them out through wallstreet where greedy folks think they will make millions, even billions. And some of them will.

That is, unitl the old familiar verse of "We can't find a bigger sucker to sell these things to" settles in. Frankly, I think they have missed EVERY point of power. When the subprime market hit-- if they had bought up the first batch of subprime foreclosures and corralled them and released them slowly into the environment, we would not have started this furious negative cycle. If they had really made sure the money they released in the first TARP and TALF funds went to borrowers and not bankers to buy more banks... we would have had something. And if they don't GET the priorities straight soon---we will have an entire generation of folks that will NOT want to have anything to do with homeownership. Priorities are the name of the game, and as always, if they are out of order, one can be doing ALL THE RIGHT THINGS, and the entire house of cards will come down. Get them in order and you have a problem solivng machine on the move.

And it get more confusing and obscured when it seems like a triority (defined as three things that need to be done first). It seems like you should just go furiously at all three and not worrry about understanding the priorities. The devil is in the details though.. For example: Give $350 B to the financial institutions without regard to shoring up the mistakes that caused the problem (ugh) or setting parameters that they only receive the funds in direct proportion that they spend them for what they were intended-- keep people in their homes.

But back to prioirites. Someone said it well, when about a year ago Bernanke mentioned the problem is we are getting more and more toxic assets. Well duh-- the FIRST PRIORITY is to hit the main bleeder from whence this all sprung and shore up the housing market. Then unfreezing the banks makes sense, but not until. Then the jobs collapse began-- If banks bungling short sales, loan mods and other programs to prevent foreclosures was gasoline being poured on a fire, the negative spiral of job reductions is like putting nuclear bombs all over.

It does all come down to that irresponsible financial procedures with self centered principles and government high on a greeding frenzy (not misspelled), with no thought of mature attitudes to regulate their dangers brought this down... and why they aren't all ousted with a fresh start no longer makes sense to me. We are repairing holes all over a rotten ship's hull.

So until we get our priorities in order at the top levels, AND think straight so the folks that screwed it up are not the ones we are trying to bury in money to fix it... we are not yet at "START". I don't care how many green shoots this or that person points out-- we are not sound! Sorry blog ramble got me at the end!

"The Washington Real Estate GAl"

Great post Mark,

read your profile, seems to me you understand what we are facing. I believe those that see the glimmers of a better market are in for a real surprise.

It is no longer the Credit Crisis and Subprime Mortgage Mess ie, real estate market. It is the Economy, all of it, job loses, factory closings, car sales, cities cutting budgets, more small businsses failing, means less revenue, the ripple effect is endless.

I think this is a collateral damage issue relating to unemployment. These are not people who took out exotic loans - they are hardworking people and the economy is catching up with them. it's so sad.

It seems like things are picking up in my market here in Laurel Maryland. Looks like I may be closing on most if not all of my short sales. The last three foreclosures I wrote on all had multiple bids. We may be insulated around here due to the Federal government being nearby.

Until there is a natural bottom to this, I don't see how this will be solved with everything being thrown at it, in an unnatural way.

I agree, no surprise. It is just going to take time to work it through. We have been through this before. Bailouts only lengthen the process and will make interest rates higher later which will cripple us then.

Many good posts here....the bottom line is the government encouraged the type of lending that led to an unprecendented run-up in sales and market "value". Banks/lenders created products to meet the demand for more affordable housing, built on the premise that real estate is "always" a sound investment. Regulators turned a blind eye as these notes were bundled and sold in bulk - often able to hide some of the more volatile pieces of the puzzle. Then when the garbage being peddled - by people in my industry to borrowers, very few of whom (on both sides of the desk) had a clue as to the real nature of the risk - began to stink, or when the investors who were greedily trying to capitalize on the same run-up (which had a very broad swath) began to realize the poor quality of the investments, the whole thing began to unravel. Add to that a general weakening of an economy largely based on service and real estate (construction, manufacturing, marketing, lending, sales, funrishings, appliances...etc, etc.). When all of this began to slow at an increasing pace, we began to see unemployment grow even further - someone on this stream mentioned "it's all about housing", amen to that!

Now the fedreal government (led by some of the same folks who exacerbated the problem) is throwing money down a black hole in hopes of stimulating some activity...In my humble opinion I say stop taxing corporations to the point where thay can't afford to do business here; stop taxing wage earners, who love to spend what they make; stop taxing everything we buy...and allow the free market to be just that, free. You will see money flow; companies hire; employees spend; houses, cars and all else that goes with them begin to move again as Americans do what they do best - work and spend.

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