Delinquency Rate Rises on FHA-Backed Loans

By NICK TIMIRAOS Home mortgages insured over the past two years by the Federal Housing Administration are falling into delinquency at a faster rate, adding to risks that could prompt the agency to request an infusion of taxpayer funds. Nearly 10.2% of borrowers who took out FHA-backed loans in the first quarter of 2008 had missed at least two consecutive monthly payments within the first 10 months. That was up from 2007, when 9.4% of FHA-based borrowers missed payments within the first 10 months. Analysts often track loans made in a particular year, or "vintage," to better gauge the future performance of the entire portfolio. About 12.3% of loans made in 2007 were seriously delinquent -- 90 days or more late -- in February 2009, for example, including 4% that were in foreclosure or bankruptcy. The 2007 delinquencies helped to boost the overall delinquency rate on FHA-backed loans in February 2009 to 7.46% from 6.16% a year earlier. Loans that are 60-days delinquent aren't necessarily headed to foreclosure, and the FHA has robust loss-mitigation programs. FHA officials say nearly 10% of those 60-day delinquencies end up in foreclosure, compared with a 27% rate for private-sector loans. But the rising default rate nonetheless illustrates the challenges that face the agency as it becomes one of the last backers of mortgages with low down payments. Top officials of the Department of Housing and Urban Development told lawmakers earlier this month that the FHA, a self-funded government agency, is weighing whether it will need to ask for taxpayer money for the first time in its 75-year history. Officials say job losses and broader economic deterioration that have made borrowers more vulnerable are primarily responsible for the rising defaults. But loans with seller-funded down payments, which have higher default rates, were "clearly adding to the overall losses," said William Apgar, a senior adviser to HUD Secretary Shaun Donovan. Congress ended the seller-funded down-payment program last fall. Loans made in 2007 with seller-funded down-payments were 60% to 70% more likely to have a 60-day default than loans made without the 100% financing, Mr. Apgar said. HUD officials told Congress that down-payment assistance programs accounted for 30% of all FHA foreclosures but just 12% of all loans. Defaults have also jumped in certain markets where loan caps limited the FHA's reach until Congress increased the limits last year. Florida accounted for 14 of the 50 markets with the highest FHA default rates at the end of 2008, up from two in 2007. In West Palm Beach, defaults nearly doubled to 10.7% in December, from 5.5% a year earlier. FHA lending there has increased by one-third. HUD officials said they are evaluating the performance of loans in markets into which the agency recently expanded. During the housing boom, the FHA never loosened its mortgage standards and it requires fully documented incomes for 30-year fixed-rate loans. The FHA's delinquency rate at the end of February remained below the 7.88% delinquency rate reported by the Mortgage Bankers Association at the end of the fourth quarter of 2008. Despite the rising defaults, the FHA sees some bright spots in its recent vintages. Rates of 30- and 60-day delinquencies for 2007 loans fell in January and February, which could indicate that serious delinquencies and foreclosures will peak this year. Officials also say the average credit score of borrowers has increased. The collapse of the subprime-mortgage market in 2007 swelled the volume of loans headed to the FHA, which insures lenders against the risk of defaults on loans that meet their standards. FHA-insured loans are available to borrowers who make down payments as low as 3.5%. The FHA's share of the U.S. mortgage market rose to nearly a third of all loans originated in the fourth quarter of 2008, from about 2% in 2006, according to Inside Mortgage Finance, a trade publication. Write to Nick Timiraos at nick.timiraos@wsj.com