Estimates Say 33% of FHA Loans Underwater

Real Estate Agent with Harry Norman Realtors

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.


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Patrick White
Home Driven Realty, Inc - Baldwin, NY
Driven to bring New Yorkers home

Good Evening Hank

Thanks for the post and information. Have a great weekend

Jul 06, 2012 09:30 AM #1
Richard Glesser
North Country Appraisal Services - Gaylord, MI

Modifying those loans would be a viable solution except that lenders are not required to do modifications.  With little equity and lower credit scores, refinancing at today's rates is not an option.  Lenders are less likely to modify FHA loans since FHA insured loans provide a safety net which minimizes their losses in foreclosure.  The simple solution - lenders must participate in all government sponsored programs or participate in none, eliminating the cherry picking of those advantageous to them.  Simply put: modify or there is no access to FHA, VA, RD, Fannie Mae, Freddie Mac, and so on.  Lenders would quickly begin actually helping struggling homeowners rather than merely presenting an image that they are helping.

Jul 06, 2012 11:19 PM #2
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Hank Miller

Associate Broker & Certified Appraiser
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