While the days of Sub-Prime lending are behind us, the aftershock is still being felt in the market place today. Many of the foreclosures and delinquencies are a result of the liar loans, also known as, stated income loans. While many feel the worst is over there are those who believe we have merely kicked the can down the road a bit and another round of mortgage defaults will surface.
Those following today’s market see the effect in both the GSE’s (Fannie & Freddie) and FHA. Fannie and Freddie continue to bleed red. Until an alternative market driven source for secondary lending emerges we will continue to pump tax payer money into a failed system. What most of the general public is not aware of is the fact that FHA is also having issues with dramatically increasing delinquencies and rising default rates from loans taken out less than a few years ago.
The most recent information from the FHA shows delinquencies are over 10% and climbing. Many believe this is based on the deteriorating economy. While this is a contributing factor, it seems apparent the low down payment requirements or even no money down options are the true drives of this recent deterioration.
Today a new home owner can put as little as 3.5% down and qualify for an FHA loan. The same homeowner may also receive up to 6% of seller concessions towards their closing costs. This guideline has been around for years. It’s when you combine this with a 55% debt to income ratio and the ability to receive up to 6% gift funds which can be used as the actual down payment.
There was a time when this was referred to as, layering the risk or stacking one risk factor on top of another. Given the current economic climate this trend will continue and within the next 12 months we will see the FHA before congress asking for bail out money to shore up their balance sheets. (Politically correct: additional Congressional Funding)
