The Federal Reserve estimates that about one-third of the 11.1 million underwater home loans in the United States are FHA-insured. These 3.6 million underwater FHA loans account for nearly half of the FHA's 7.4 million outstanding loans. Since about 72 percent of all outstanding FHA loans date from 2009 or later, a reasonable estimate would be that about 1.5 million of recent FHA borrowers are underwater.
I wish I could say that I'm surprised. As noted in Appraisal Buzz, there seems to be a ready supply of soon to be distressed inventory.
This comes as no surprise since the FHA continues to combine minimal down payments (average of 4 percent) with slowly amortizing thirty-year loan terms. As a result, earned homeowner equity (the combination of down payment and scheduled loan amortization) amounts to less than 10 percent after four years, or about enough to sell a home at the break-even point if home prices stay steady. However, prices have declined nationally about 7 percent since mid-2009, with lower-priced homes declining even more. When combined with borrowers' low FICO scores and high debt-to-income (DTI) ratios, the result is a continuation of the FHA's destructive lending—lending that has resulted in 20–25 percent of recent borrowers facing a 10 percent or greater likelihood of foreclosure.
Wait a second, there really isn't cause for concern. With Washington's guiding hand, Im certain that everything will be just fine.