New FHA Mortgage Requirements Will Reduce Default Rates

NEW YORK, Jan. 24, 2013 /PRNewswire-iReach/ -- Critics of FHA backed loans claim that the Federal Housing Administration (FHA) is producing delinquencies that will in the long run lead to federal government bailouts. Among other concerns, critics of the FHA home loan insurance allege that when compared to a mortgage that is issued by a private bank, default rates are much higher among those home loans that are backed by the FHA. They further maintain that FHA borrowers are more likely to go underwater because the deposit requirement is significantly lower than a non-FHA backed mortgage.[1] Although critics raise valid concerns, it is vital that these contentions are examined in actual context.

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After the 2008-2009 housing nose-dive, protective measures were implemented. This move was prompted by the need to prevent future collapse while still meeting the needs of buyers who do not outright qualify for a bank loan. Up until recent, an FHA backed mortgage placed little or no emphasis on credit score.  Buyers are now required to have a minimum FICO score. What's more, borrowers must also show that they have maintained two lines of credit for over two years. These implementations reveal a rather different picture. In plain terms, FHA defaults will in future decrease because these mechanisms were not previously in place. 

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While some have likened a FHA loan to a sub-prime mortgage, these comparisons are in reality unrepresentative. A sub-prime mortgage jacks up rates on a certain class. An FHA backed home loan on the other hand, allows those who would otherwise be unqualified to become home owners. The FHA is a self funding agency. It operates solely on the insurance paid on home loans. It does not issue the home loan, it simply protects the lender in the event of a default. Though opponents claim that the number of FHA backed home loans rose to 27% in the month of March 2012,[2] on the face of it, they fail to acknowledge the greater percentage of FHA backed loans that were not in default.  Thus, the program currently serves the purpose for which it was established. More so, the results of FHA backed mortgages should be measured by number of home owners—and not defaults.

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Though critics claim that FHA backed mortgage defaults will continue to rise, FHA officials assert that they are experiencing high credit borrowers and that they have implemented measures to lower delinquency rates over time.  An FHA backed home loan impacts those who do not qualify for conventional loans in positive ways. Not only does it allow a borrower to purchase a home, it protects the lender from defaults. In the light of the predatory lending practices that were perpetrated on low credit-homebuyers in the not too distant past, it is apparent that a FHA backed mortgage increases the number of home owners across the United States without setting the buyer on a road to nowhere. Though default rates are high among FHA backed home loans, many of these defaults result from market conditions, as opposed to the process through which the Federal Housing Administration qualifies applicants.

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