Mortgage Loans, Rates and FHA Loans

I saw something interesting in the Weekly Mortgage Applications Survey released by The Mortgage Bankers Association (MBA) last week. This survey indicates the application volume of mortgage loans, and it decreased 3.1% from the earlier week. This decrease in the application volume came at the back of a couple of weeks of gains, and despite the fact that mortgage rates decreased in the week.

However the most interesting part of the survey was the statistic on government insured mortgages. In August, the share of government insured mortgages rose to 40.4%, which is the highest it has ever been since February 1991.

Government insured mortgages are mortgages which the government agrees to pay if the homeowner defaults. The Federal Housing Administration (FHA) is one agency that offers this type of insurance. WSJ recently reported that there is a chance that the FHA may need a taxpayer bailout as a growing number of people with FHA insured loans owe more than what their houses are worth. FHA needs to maintain reserves (after losses) of at least 2% of their insured loans, and these reserves came down to 3% last year (they stood at 6.4% in 2007). The latest numbers will be released on September 30th.

As a means to stabilize the housing market, FHA lent aggressively, and increased its market share to 23% in the second quarter this year from less than 3% in 2006. But the depleting reserves show that the gain in market share has come at a cost: loans have gone bad and probably many of them wouldn’t have been insured if the housing market didn’t need stabilization.

This data shows the other side of the seeming stabilization of the housing sector. There is growth in the government insured segment, but there are defaults too. This indicates that the problem of mortgage defaults has not gone away. It is probably just delayed to the future because of government intervention and support to the mortgage markets.

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