FHA loans post higher delinquencies

At a time when the mortgage market is seeing steady signs of improvement, loans backed by the Federal Housing Administration (FHA) continue to see an increase in the number of borrowers seriously delinquent on their mortgage and falling into foreclosure, according to a new quarterly report issued by the Office of the Comptroller of the Currency.

For the year ending March 31, FHA-backed loans delinquent 90 days or more increased nearly 27 percent, while foreclosures soared nearly 17 percent. Meanwhile, bank loans saw delinquencies decrease by 39 percent and foreclosures fall nearly 10 percent.

FHA-backed loans tend to be attractive among first-time home buyers, since they offer low downpayments of 3.5 percent and require lower credit scores and incomes to qualify. The low downpayment requirements with FHA-backed loans, however, mean that borrowers have less cushion if their property drops in value and borrowers can quickly find themselves underwater on their mortgage, housing experts say.

The share of FHA-backed loans in the mortgage market has drastically increased in recent years.

However, FHA says it has been trying to help offset losses in recent months by increasing its insurance premiums, ramping up its requirements for minimum credit scores of its borrowers, requiring larger down payments for any borrowers with credit scores below 580, and prohibiting home sellers from helping borrowers with the downpayment, CNNMoney reports.

“We expect the new books will continue with their better performance, primarily because of the steps that were put in place,” FHA officials told CNNMoney. “And we are benefiting from having more high-credit borrowers.”