The Wall Street Journal recently found that slightly more than 10 percent of borrowers who took out FHA loans in the 1st quarter of 2008 were at least two months behind within the first 10 months. That is up from a 9.4 percent rate seen a year earlier. These numbers may be up because FHA lending has accounted for more than one-third of all residential mortgage originations recently, up sharply from the two-percent level seen two years earlier. The FHA is one of the only loan outlets left for those borrowers with less than perfect credit and a minimal down payment. They have recently been trying to re-vamp their wild-west style lack of risk analysis (yes, I said it) by stamping out seller down payment assistance loans and slashing the maximum cash-out loan-to-value ratio at 85 percent.
What worries me is that it seems the FHA is the only entity willing to give creative loans to buyers with poor-credit and say, less than 4 percent down. Almost all of our market downturn can be traced back to private banks doing the same thing a few years ago. So what will happen down the road when it is not private banks but the government who will be holding so much of this high-risk debt?