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Government Considers FHA Subsidy as Delinquencies Rise

The Senate Appropriations Subcommittee held a hearing on Thursday to discuss the financial viability of the government's mortgage insurer the ""Federal Housing Administration"":http://www.fha.gov (FHA). According to the _""Associated Press"":http://www.google.com/hostednews/ap/article/ALeqM5hTPEQZyeqPg80iIH0uvvPz6Lz3mgD97AGFB80_, the Obama administration soon may be forced to subsidize the agency with taxpayer dollars as economic troubles cause defaults and foreclosures to surge among FHA-insured loans.
Lawmakers said that no decision has been reached on whether or not to prop up the mortgage insurer, as they have with a number of national lenders and mortgage giants Fannie Mae and Freddie Mac. But, as _AP _reported, if FHA's losses grow too high, the agency would be forced to raise additional capital — either by increasing insurance premiums for new borrowers or seeking a subsidy from the federal government.
Shaun Donovan, secretary of the ""Department of Housing and Urban Development"":http://www.hud.gov (HUD), told senators that officials are currently evaluating whether the administration's $3.6 trillion budget should include federal aid for FHA. But, Donovan assured the subcommittee that FHA is ""unlikely to face the catastrophic losses borne in the subprime sector,"" because the agency has more conservative standards and established loan limits that have prevented it from insuring higher-priced properties whose values have nosedived.
As the subprime lending market has dried up and credit lines from banks have tightened, FHA has experienced a surge in mortgage applications. The agency's share of the market has jumped to more than 30 percent, up from just two percent three years ago and now at its highest level in two decades.
But along with that growth also comes a hike in delinquency rates for FHA, which insures mortgage lenders against the risk of defaults on home mortgages. An agency spokesperson told _""The Wall Street Journal"":http://online.wsj.com/article_email/SB123840821794969275-lMyQjAxMDI5MzM4MDQzMDA4Wj.html_ this week that 7.5 percent of FHA loans were ""seriously delinquent"" at the end of February, meaning that the loan is at least 90 days or more overdue, in the foreclosure process, or in bankruptcy. That figure is up from 5.8 percent in August. The _Journal _also reported that foreclosed FHA homes owned by HUD totaled 39,687 in January, up 22 percent from a year ago.
According to a _""Washington Post"":http://www.washingtonpost.com/wp-dyn/content/article/2009/03/07/AR2009030702257.html_ report last month, more than 9,200 home loans insured by the FHA in the past two years have gone into default after no or only one payment had been made, and the pace of these no-pay defaults has tripled in the last year.
Regulators have warned Congress that the FHA is struggling to properly screen the influx of lenders now applying to issue their insured loans, and these officials are worried that the lack of oversight could leave home buyers vulnerable to predatory lending practices that slip through the over-burdened agency's screening process.
The _Associated Press_ reported that to help alleviate these worries, Donovan told lawmakers the agency has activated ""SWAT teams"" that will conduct unannounced inspections of lenders whose loans are showing unusually high default rates and can revoke lenders' ability to do business with FHA if their practices prove questionable.
Lennox Scott, a member of the ""National Association of Realtors'"":http://www.realtor.org (NAR's) Real Estate Services Advisory Board also testified before the Senate subcommittee on Thursday, and expressed the association's concern for the safety and soundness of FHA's programs due to its dramatic growth over a short period of time.
""FHA is now a principal source of financing for millions of America’s families, and without it, the economic crisis would be significantly prolonged. This is why it is so important to invest in FHA improvements and advancements,"" Scott said.
NAR is proposing a number of changes that it says will help maintain safe and affordable FHA loan products. These include investment in staff and technology improvements; increased oversight and risk management; technical correction to help implement FHA programs; and monetizing the $8,000 first-time home buyer tax credit to allow buyers to apply it toward downpayment requirements, NAR said.

About Author: Carrie Bay

Carrie Bay is a freelance writer for DS News and its sister publication MReport. She served as online editor for DSNews.com from 2008 through 2011. Prior to joining DS News and the Five Star organization, she managed public relations, marketing, and media relations initiatives for several B2B companies in the financial services, technology, and telecommunications industries. She also wrote for retail and nonprofit organizations upon graduating from Texas A&M University with degrees in journalism and English.
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