The Federal Housing Administration announced that the default rate on FHA backed loans passed 9% as of Q409. This is concerning news for the housing market considering that FHA insured a total of $752 billion in mortgages in 2009, up 24% from 2008. Despite these growing default rates, US Department of Housing and Urban Development (HUD) secretary Shaun Donovan reported to Congress that the FHA backed loans will not go the way of subprime loans and that FHA was taking measures to reduce its risk in these loans.
This was followed in January by FHA raising the minimum FICO scores needed to qualify for a loan and raising its premiums so that borrowers had more stake in their loans. Earlier this month, HUD announced a budget cut for FHA due to a raise in its projected profits for the coming months. However, it is important to realize that should the default rate on FHA loans continue, not only will the FHA budget need to be raised, but additional funds from the government will be necessary to keep the administration's reserves above its minimum.
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