December 21, 2014

FHA Lists 50 Counties With Highest Default Rates

The rates of defaults and delinquencies on FHA mortgage loans continues to surge.  The latest Monthly Report to the FHA Commissioner on FHA Business Activity reveals that almost 1 out of every 10 FHA mortgages is now classified as “seriously delinquent”.   A seriously delinquent loan is defined as being 90 days or more past due, in bankruptcy or foreclosure.

As of December 31, 2011, the FHA insured a total of 7,415,002 mortgages of which 711,082  or 9.6% were seriously delinquent.  The prior fiscal year showed a total of 598,140 mortgages seriously delinquent.  The number of mortgage defaults from the previous year increased by a very substantial 18.9%.

The large increase in FHA defaults is a source of growing concern since the FHA’s insurance reserve fund to cover loan losses is virtually depleted.  By law, the FHA is supposed to maintain a capital ratio of 2.0% but fund ratio is currently at only 0.12%.

Including the number of FHA loans that are past due by 30 days or more, almost 18% of all FHA loans are in some stage of delinquency.  Critics of the FHA program point out that when almost 1 out of every 5 borrowers cannot pay back their FHA loan on time, the FHA underwriting guidelines need a fundamental overhaul.

The Monthly Report to the FHA Commissioner discloses the 50 Metropolitan Statistical Areas (MSA) with the highest rates of FHA defaults on single family homes.  A MSA is defined by the government as “one or more adjacent counties or county equivalents that have at least one urban core area of at least 50,000 population, plus adjacent territory that has a high degree of social and economic integration with the core as measured by commuting ties.”

The county taking first prize for the highest number of FHA defaults is Ocala, Florida, with an astronomical 21% of all FHA mortgages in serious default.  Keep in mind that the default rates below only include “seriously delinquent” mortgages which are past due 90 days or more, in bankruptcy or foreclosure.  Based on FHA statistics, at least another 10% of mortgages in these counties are delinquent by more than 30 days but less than 90 days.

Based on the huge default rate of FHA mortgages, it is important for borrowers to fully assess their financial capabilities before buying a home using FHA financing.  Although the program has liberal guidelines to promote homeownership, the trauma of mortgage default can wind up putting many families in a worse position than if they had remained renters.  Besides a ruined credit score and losing the downpayment, a foreclosure puts serious emotional stress on a family.

Before considering the purchase of a home, which is a major financial and emotional investment, an independent financial adviser should be consulted with to assess the overall situation.  Please also see “A First Time Home Buyer Asks How Much Home Can I Afford?”