FHA Mortgage Loans Causing a New Mortgage Depression

The Banks Nightmare – FHA Home Loans

The financial markets may be facing another turmoil, as the FHA insured home loans may crack down some of th largest nations banks. The mortgage lenders such as Bank of America (BAC_), Wells Fargo (WFC_) and JPMorgan Chase are facing large losses due to a  non proportional growth of mortgages borrowed through the FHA.

The review below by By Philip van Doorn, from The Street.com describes how the financial markets may be on a high roller coaster speed ride into another wall!

“In its annual report to Congress on Tuesday, the FHA said that its insurance fund declined even further from last year and its capital ratio “measures reserves in excess of those needed to cover projected losses over the next 30 years.”

The agency’s economic worth has declined to $2.6 billion as of Sept. 30, from $4.7 billion a year earlier.

The FHA insures over $1 trillion in single family mortgage loans, with borrowers paying a monthly premium for the coverage. The agency said that its Mutual Mortgage Insurance Fund, or MMI, had increased to $33.7 billion as of Sept. 30, from $33.3 billion a year earlier, but that its capital reserve ratio was just .024%, falling from 0.50% a year earlier, and far below the 2.00% minimum required by Congress.

The FHA says thr agency projects that its capital ratio will reach the required 2.00% during Fiscal 2014.

FBR Capital Markets analyst Paul Miller said in a report on Wednesday that since the FHA believes that “unless housing prices stabilize, the insurance fund has a 50% chance of running at a deficit,” banks fear that “the FHA’s worsening financial condition could prompt the agency to audit claims.”

When an FHA-insured loan goes bad, the lender files a claim with the agency, which the FHA typically pays-out quickly. Miller said that “due to the state of the FHA’s financial position and the possibility of further home price declines, the agency is motivated to take a closer look at claims it has paid out to recoup losses,” and that “the agency’s hyper-technical servicing requirements make it more likely that servicers, and not originators, could be most at risk in the near term.” Read more..

I think the real threat is not from the FHA but from the borrowers who fail to stay current on the FHA mortgages, the mass underwater mortgage situation, where 60% of the mortgaged homes are underwater, where in some places borrowers decide not to pay, and wait to be evacuated. This is the main issue that need to be addressed.

Without the FHA insured mortgages, millions would be homeless, the lenders need to be able to join the new Obama reformatted refinancing program (HARP), to avoid such a financial disaster as mentioned above to take place.

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