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Homeowners who get FHA aid could fall behind again

Blooberg News / October 7, 2008
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NEW YORK - The Federal Housing Administration has grown so large that by the end of the year it will guarantee mortgages for three in 10 US borrowers, many of whom have bad credit or loans that required no verification of income.

Still, Congress wants the FHA to do more. In a move to encourage lenders to rewrite mortgages with more favorable terms, the Hope for Homeowners program, unveiled Oct. 1, authorizes the FHA to guarantee as much as $300 billion of 30-year, fixed-rate home loans for struggling borrowers. The problem is the Congressional Budget Office says about one-third will fall behind again on their new loans.

"I hope it's not setting them up for another crackup," said David Olson, a former director of market research at Freddie Mac.

As the government struggles to blunt the worst housing decline since the Great Depression, rewritten mortgages may not be enough to stem rising defaults, said Olson. In the second quarter, the monthly payments on 17.85 percent of subprime mortgages - those given to people with bad or limited credit histories - were more than 90 days late, seven times the rate for prime mortgages, according to the Mortgage Bankers Association.

Of the 133,000 defaults the Congressional Budget Office estimates over the three years, the FHA will be able to recover about 60 percent of the mortgage amounts, the office said.

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