The Federal Housing Administration’s (FHA) non-performing loans and losses continue to pile up, threatening to drastically change the dynamics of the lending industry and the most profitable real estate investment strategies.
Recent data show an almost 27% jump in non-performing FHA loans that were 90 days or more delinquent in the 12 months leading up to March 31, 2012, and this hasanalysts raising new alarm bells. Yet this should hardly be as much of a concern as the leak by a FHA loan servicer in April of this year which revealed a more than 70% spike in foreclosure filings.
However, the real concern here is that growing amounts of non-performing FHA loans could bankrupt the mortgage insurer. Instead of building up emergency reserves to the 2% threshold mandated by Congress, they dove even further from 0.53% in 2009 to barely 0.24% at the end of 2011. With more delinquencies since then, FHA could already be on the brink of insolvency.
The concern about these non-performing “toxic” loans may well be overblown due to the current large percentage of the market they make up and the fact that they are becoming more of an issue due to broader economic problems rather than underwriting quality — but they certainly seem to be the next stop on the witch hunt for now.
This has resulted in more calls for much tougher mortgage rules, including larger down-payments and higher credit scores, which, in addition to recently increased fees, could threaten to slow down the real estate market significantly. Of course, this would only likely compound the number of non-performing loans the FHA has to bail out, though that hasn’t stopped regulators from making the same mistakes before.
Unless mortgage lending and access to credit is loosened up in a big way in a real hurry, it isn’t unreasonable to predict a throwback to third-world-style markets where families move far less frequently and borrowing is avoided like the plague due to double-digit interest rates.
This makes buying up mortgage notes a far more attractive prospect for a long term investments than simply attempting to flip houses when REO prices are rising but with few end-buyers qualifying to take them off of investors hands. On the bright side, there are plenty of both performing and non-performing loan notes to be picked up right now for those with cash or access to capital.