Have FHA Loans Become The New Subprime?

According to many of the experts, the Federal Housing Administration is going to need a bailout in the near future because the FHA insurance fund has dropped below the 2% of total liabilities that Congress has mandated.

From a recent WSJ article:

“…this political history may be repeating itself with the Federal Housing Administration, which yesterday announced that its capital reserve ratio has fallen to 0.53%. That cushion is far below the 2% of its liabilities that Congress mandates, itself a 50 to 1 leverage ratio, and down from 3% last autumn. The FHA’s mortgage guarantees in 2009 are four times higher than they were in 2007. Nearly 18% of its loans are 30 days or more past due, while mortgages guaranteed in 2007 are “on par with FHA’s worst-ever books from the early 1980s,” according to the Department of Housing and Urban Development’s report to Congress. The financial deterioration is the result of the agency’s plunge into high-risk loans over the last two years, asking dangerously low down payments of 3.5% from unqualified borrowers.”

Many different places are writing how borrowers who qualified just a few years ago for a subprime loan are now using FHA loans to finance their homes. Or, at least that is the impression that some people seem to be getting.

Seems to only make sense because there are no more subprime loan programs left… and someone should sound the alarm, right?

Maybe.

But I personally wouldn’t put those data points together and come to a conclusion.

You see, FHA guidelines are getting more strict, not less. Minimum credit scores that are required by many lenders are now 640 and the trend seems to be toward more tightening. The FHA streamline refinance now has much more stringent qualification criteria – not like the FHA streamline refinance that was around for at least the last decade.

So if indeed, FHA comes out and says they need a bailout, why do they need a bailout if they are not the new subprime?

My opinion – because many, many people are struggling with employment (either being unemployed or underemployed) and when many homes are worth less than the mortgage on the home – default numbers are going to skyrocket.

No matter if they are FHA loans or not.