The Wall Street Journal
By: Nick Timiraos
June 7, 2010
The government agency that backs home loans may have some good news for taxpayers.
Home mortgages insured by the Federal Housing Administration are falling into delinquency at a slower rate than they have in the past. If the trend is maintained, it could help the government agency avoid a taxpayer bailout.
In April, nearly 8.5% of loans backed by the agency were 90 days or more past due. While that was still higher than a year earlier, April marked the third consecutive month in which delinquencies, which peaked at 9.4% in January, declined.
The FHA figures come amid other signs that mortgage delinquencies may have plateaued. The number of loans that were 90 days or more past due at Fannie Mae and Freddie Mac, the government-owned mortgage-finance giants, fell in March for the first time in three years. Last month, the Mortgage Bankers Association said that nationally, the number of loans that were 90 days or more past due fell to 9.54% at the end of March, from 9.67% at the end of 2009.
"It's a very important trend to the extent that we're not continuing to get worse," says Thomas Lawler, an independent housing economist in Leesburg, Va. While loan performance typically improves in February and March, when homeowners receive tax refunds, the FHA's gains in April mean that "all of a sudden it's starting to look like it isn't just seasonal."
But even if the recent improvements continue, the mortgage market will remain troubled for some time because delinquencies are stabilizing at a "horrendously high level," says Mr. Lawler. Banks have so many delinquent loans that it could take years to clear them out. An estimated 4.9 million borrowers were 90 days or more past due or in foreclosure at the end of March, up from 3.7 million one year earlier, according to the MBA's quarterly survey.
And the latest gains could prove fleeting if home prices fall any further. Despite signs that home prices are steadying in many markets, there is some concern that elevated levels of foreclosures could hit the market, weighing on home values.
"If prices drop by 10% to 15% this year, you're going to unleash another new wave of problems," says Ted Jadlos, president of LPS Applied Analytics, which tracks loan performance.
Even the FHA remains guarded. "We're not declaring victory by any stretch," says David Stevens, the FHA's commissioner. "There's plenty of room for caution."
Officials attribute the improvement to a strengthening economy, along with government intervention to stimulate housing demand and keep mortgage rates lower than 5%. Also, more borrowers have received loan modifications. .
At the FHA, there has been a particularly marked improvement in mortgages that were originated last year. Nearly 5.3% of all loans originated in 2009 had missed two or more payments within their first 12 months, compared with a delinquency rate of 8.9% and 9.3% within the first 12 months for loans originated in 2008 and 2007, respectively. Nearly 22% of loans made in 2008 and 2007 have missed two or more payments, compared with 7.5% of 2009 originations.
Performance has improved largely because lenders began tightening their standards in mid-2008. Last year, two-thirds of all FHA-backed loans went to borrowers with credit scores of more than 660, up from 45% of all borrowers in 2008. In addition, the agency ended in 2008 a program that let sellers fund down payments to buyers, which was responsible for an outsized share of defaults. Last summer, Mr. Stevens began aggressively weeding out lenders responsible for a high share of "ugly" loans.
The FHA doesn't lend money directly to home buyers, but insures lenders against losses on loans that meet certain standards.