Bailing out the bailers

Tuesday - 4/14/2009, 9:00am EDT

WFED's Jane Norris

As heard on sister station WTOP

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By Jane Norris
FederalNewsRadio

One government agency, one of the last remaining sources of low down payment home-loans may soon need a bail-out, itself!

Q: The Federal Housing Authority backed home loans with low down payments, why are they in trouble?

A: The Federal Housing Authority issued seller funded home loans until last fall when they realized that people who did not have some down-payment on their homes were defaulting in much higher numbers. HUD officials told Congress that down-payment assistance programs accounted for 30% of all FHA foreclosures but just 12% of all loans. So with no skin in the game, it was more likely that homeowners will stop paying their loans. So the agency stopped 100% financing, but qualified homeowners can still get loans with as little as 3.5% down.

Q: Is the overall downturn in the economy contributing to the problem?

A: The collapse of the mortgage market increased the number of loans that the FHA insured they now have nearly one third of all loans originated in the fourth quarter of 2008 compared to only 2% in 2006. Officials say job losses and broader economic deterioration that have made borrowers more vulnerable are primarily responsible for the rising loan defaults. But it's really the seller-funded down payments, that they believe are the problem. They have higher default rates and the agency says that they are clearly adding to the overall losses.

Q: What will the Government do about this?

A: 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.

For more information, see the Wall Street Journal article, Delinquency Rate Rises on FHA-Backed Loans

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