NCTimes.com Californian.comLast modified Friday, April 3, 2009 8:42 PM PDTHOUSING: Now federal loans are sinking, tooBy ZACH FOX - North County TimesOnce considered among the safest loans available, government-insured mortgages issued last year have performed worse than the subprime loans that kicked off the collapse of the nation's housing market, according to data from a research firm.So far, government bailouts have put up to $2.9 trillion of taxpayer money at risk, according to the government official in charge of overseeing all bailouts.A huge level of defaults on loans insured by the Federal Housing Administration, which analysts called "stunning," raise the specter of further market turmoil and more taxpayer funds sent toward fixing the mortgage crisis."Frankly, I wouldn't be surprised if you called me up in a year from now and asked, 'What do you think about the FHA bailout?' " said Norm Miller, a professor at University of San Diego's Burnham-Moores Center for Real Estate.First American CoreLogic, a prominent mortgage data firm, reported this week that 20.7 percent of all FHA loans issued in 2008 were at least 60 days late by 10 months after the origination date. By the same metric, 14.1 percent of subprime loans issued in 2007 were 60 days delinquent.The main problem with the delinquent FHA loans was low down-payment requirements, said Sam Khater, senior economist for First American CoreLogic.While most mortgages issued by private banks now require at least 10 percent down payments, FHA loans allow borrowers to buy a home who put up just 3.5 percent of the cost.In San Diego County, prices fell more than 2 percent each month from August through January, according to Standard & Poor's Case-Shiller Home Price Index. In Riverside County, prices have tumbled even more.That means within two months of purchasing an FHA-insured home, the borrower probably owed more than the value of the home. And as layoffs mount, a loss of employment typically leaves the borrower in foreclosure or short sale ---- where the borrower resells and the lender settles for less than the amount of the loan."When you put out a (low down payment) product in the context of very high depreciation, it's going to happen," Khater said about the high delinquency numbers.By definition, FHA loans carry little equity. But the risk of failure was increased by the implementation of "down payment assistance" programs implemented by home builders, said Ramsey Su, a San Diego housing analyst.Those programs often covered the rest of the down payment and sometimes even covered the closing costs, meaning a homebuyer could borrow more than the value of the home and pay no money whatsoever up front.The government has since discontinued the programs.But before they did, FHA became the resource for riskier buyers, Su said."FHA became the subprime lender after the subprime market died," he said.As mortgage financing dried up over the past year, the Federal Housing Administration has experienced a renaissance, going from rare to prevalent among new loans. FHA caters to low-income borrowers who have little money to put down, but the loans typically carried stringent qualification requirements such as low debt-to-income ratios.The FHA insures more than 4.8 million loans, according to the department.Locally, Bank of America has seen FHA loans go from virtually nonexistent to 35 percent to 40 percent of the overall business, said Jim Loney, a sales manager at the lender's Carlsbad office.FHA loans were especially rare in San Diego County because the products used to be capped at $362,790. But in 2007, Congress agreed to raise the limit in high-cost areas, upping the maximum loan in San Diego County to $697,500."I didn't do an FHA loan for nine years," said Dave Hopkins, a mortgage broker in Encinitas. Now, he estimates the products constitute 10 percent of his business.
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