FHA Underestimates Mortgage Delinquency Rates

by 29 Jun 2012

(Bloomberg) -- More than 40 percent of the U.S.Federal Housing Administration loans originated from 2007 through 2009 will be delinquent within five years and the agency’s data underestimate that risk, according to a study by the Federal Reserve Bank of New York and New York University.

The research published today used loan information from data provider CoreLogic Inc. (CLGX) to track FHA-insured mortgages and predict default rates based on borrower characteristics.

The FHA, part of the Department of Housing and Urban Development, underestimates risk because it counts refinanced mortgages as successful loan terminations, even though the same borrowers are refinancing into new mortgages backed by the government insurer, according to the paper published on the website of the National Bureau of Economic Research. The researchers computed the risk of default by linking all of the loans connected to each borrower.

“Having such a very large fraction of the people who borrow from you become delinquent could never be regarded as good public policy,” said Andrew Caplin, a professor of economics at New York University and one of the study’s authors.

The study is the latest in a series of critiques by Caplin and others of the way the FHA tracks its financial health. The agency, which took on more loans as private insurers left the market in the aftermath of the 2008 financial crisis, guarantees about $1.1 trillion in home loans.

HUD spokeswoman Tiffany Thomas Smith declined to comment in detail because the agency has not yet reviewed the study. The FHA has defended its financial performance data and stressed that the quality of its loans is improving.

Read full article from Bloomberg


  • by joe | 6/29/2012 3:43:44 PM

    A blind man could have seen this coming and the guys running the show couldnt? 55% DTI, 3.5% down of borrowed (gift ) money and 1 day at a job.... HMMMM, how was this supposed to end? Loan officers and the sheeple public at large are crying because they actually have to show income and leave the drug money under the mattress or season it in a bank acct until the deposit doesnt show for 2 months and our Underwriting is too tight?

    Have you seen that Canada just said 30yr fixed were too risky so their longest term is not 25yrs and highest LTV is 75%?

    What we really need is for all underwriting to take into account residual income like VA does. I can show in many cases how that 55% gross DTI after basic real life expenses (no fluff) will put someone upside down on their finances from day 1.

    Pushing the streamlines was the perfect way to make the FHA book of business not look like the steaming pile of shite that it is but You can only polish a turd so much folks and the secondary market isn't buying it... . Good, I'm tired of the bank bailouts anyway.


Is TILA-RESPA a good or bad thing long term?