FHA vs Subprime: default and foreclosure rates

By
Mortgage and Lending with Wells Fargo Home Loans

The mortgage industry has been self regulating and making guidelines for SubPrime lending stricter for at least the past 6 months.  Now with the pending "implosion" of the subprime market, congress is looking at other ways to further regulate the lending practices and guidelines for "risky, higher-interest home loans made to people with blemished credit records"

Tougher rules eyed for high-risk home loans Delaware News Journal

The article above also has some interesting data for the default rates on loans held by various types of lenders including Prime loans, SubPirme loans, FHA, and VA.  SURPRISE! While the news is concentrating on the subprime market, and congress is looking to play the blame game thinking it will help to correct the current market issues, no one is paying any attention to the default of FHA LOANS, the higest default rate.  Total loans with any late payments is high at 12.87% for SubPrime loans, it is even higher at 13.54% for FHA loans.  These are loans that are already regulated and INSURED by the government.  So when lenders take losses on these loans the government covers those loses..... I mean tax payers cover these losses.

So why is the concentration on the SubPrime market?

Because while the number of people with late payments (30, 60 or 90 days late) is higher for FHA the foreclosure rate of 2.19%  is less than half of the foreclosure rate of SubPrime loans 4.53%.  This is due largely to the fact that FHA was able to negotiate various workouts and estimates for 75,000 borrowers or abut 60% of the defaults.  Were these borrowers in Subprime loans they would not have had similar representation negotiating for them.

Mortgage woes may help revive FHA Wall Street Journal

 

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Rainer
111,655
Carole Cohen
Howard Hanna Cleveland City Office - Cleveland, OH
Realtor, ePRO

Thanks Brian, I appreciate the heads up. And for some reason the FHA information makes me feel better about them. But then I wonder: you have private mortgage lenders who could do the same kind of negotiating but won't, because they don't own the mortgages and feel no fiduciary responsibility?  At least that is how I read it. Obviously working out a payment plan is better for everyone rather than a foreclosure. - good links too, thank you!

Mar 16, 2007 03:44 AM #1
Rainer
62,962
Flemington, NJ

Nice post.  I have always felt FHA is the best subprime loan.  Another difference as well as FHA working out payment plans is that all FHA loans are full doc loans.  Many of the subprime "stated/stated" loans are based on false incomes and once late, have little chance of getting caught up.

Mar 19, 2007 08:52 AM #2
Rainer
33,698
David Petrovich
S.P.O.C.H. a 501c3 Charitable NP - Oakhurst, NJ

Another factor to consider when comparing the foreclosure rate between FHA insured, and subprime loans is the willingness of the lender to 'workout' a non foreclosure alternative.  The FHA offers a comprehensive bundle of workout options and is committed primarily to preserve homeownership or at least mitigate potential loss by facilitating preforeclosure short sales by accepting less than due but avoiding expensive foreclosure/REO costs.

The subprime mortgage portfolio represents a unique investment vehicle.  Many portfolio investors have purchased an inexpensive derivative insurance which pays off if the portfolio's ROR dips beneath a certain level. Simplistically, the investors will be paid if a certain number of loans default. There has been no real incentive to offer 'workouts' for loans in jeopardy of default and foreclosure.

Satisfied with early on interest earnings, and insurance disbursements, the mortgage portfolios are sold at discount to another level of investor.  

ForeclosureFocusUSA Blog 

 

Mar 23, 2007 12:33 AM #3
Anonymous
John Elbe
Beleive it or not, taxpayers have never paid a cent into the FHA fund. The MIP FHA collects is more than enough to pay claims, in fact it is a net contributor to the federal budget.  Also, the FHA vs. subprime foreclosures tell the success of the FHA Loss Mitgation. Especially the partial claim that can defer up to 12 months PITI as a second. Very different than the subprime loss mit.
Mar 27, 2007 07:23 AM #4
Rainer
14,835
Brian Papaccio
Wells Fargo Home Loans - Newark, DE

John good point about the MIP. 

That reminds me of something I learned or was at least told about SubPrime loans back when I went through training.  The theory was that that rather than charging PMI (or MIP) or some other form of insurance to cover the risk of SubPrime loans, lenders covered their risk with higher interest rates, and prepayment penalties insured they made enough on the loans to cover any potential losses.

I guess the risk assessment calculations and rates were not enough to cover the current losses they are experiencing.

Mar 27, 2007 07:47 AM #5
Anonymous
John Crenshaw
Hey Brian, killer post. In fact I'm blogging about it today!
Oct 05, 2007 05:49 AM #6
Rainer
1,140
Brian "Nick" Collins
BCAppraisals - Lexington, SC

Great post.  I have been wondering if the FHA was going to take the place of the sub prime market and eventually be in just as much trouble with the tax payers paying the price.  I also thought the higher rates were there to cover the losses, must not have been high enough....   I also think the adjustable rates and lack of available financing now (to get out of the adjustable) is playing a high role as well. 

Apr 24, 2008 05:47 AM #7
Anonymous
F red Quintanal
Speaking of FHA do you know a link to get a refresher course on FHA loans, thanks Fred
Apr 24, 2008 06:05 AM #8
Anonymous
Catherine Coy
Brian "Nick" Collins wrote: I have been wondering if the FHA was going to take the place of the sub prime market and eventually be in just as much trouble with the taxpayers paying the price. 


http://www.hud.gov/news/release.cfm?content=pr08-050.cfm

Currently, FHA´s insurance fund is self-sustaining, meaning that it requires no appropriation of taxpayer dollars because homeowners pay for the product themselves.

John Elbe's comment above bears repeating:  taxpayers have never paid a cent into the FHA fund. The MIP that FHA collects is more than enough to pay claims; in fact, it is a net contributor to the federal budget. 
Apr 25, 2008 12:40 AM #9
Rainer
1,455
Rick Bengson
Showing Suite, Inc. - San Diego, CA

I saw your blog posting about foreclosed properties. We offer a great tool to help you in competitive REO listings. www.foreclosurefeedback.com . The Asset manager's can login and see all of the feedback on their REO properties, see what you are doing to market them and print reports to document the need for price reductions. Call in to sign up instead of online and tell them Rick said to give you the first 90 days for free to try it out at 858-270-1055 ext 113. If your competition doesn't offer this, you will definitely have a leg up on them.

Rick

Jan 05, 2009 05:54 AM #10
Rainer
72,353
Jody Lautenbach
Century 21 Premier Associates - Pella, IA

Things change so fast it's hard to keep up  - thanks for the info.

Mar 15, 2010 03:49 AM #11
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Brian Papaccio

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