The FHA is a big reason that home prices haven't fallen even further. The FHA's aggressive lending programs have continued throughout the housing downturn, causing its market share of the mortgage industry to grow from 2% in 2005 to 23% today. The FHA is an even larger percentage of the new home mortgage industry – nearly 25% according to HUD.
The FHA insurance fund, however, is likely running dry. According to a report from mortgage finance experts, the FHA will not meet its minimum requirement as of its fiscal year-end, which is only 26 days from now. For months, we have been investigating this and reporting our findings to our clients.
While almost all of the experts believe that Congress would support the FHA if necessary (it's currently self-funded), we wonder if FHA officials will be under pressure to continue tightening their lending policies, which currently allow 96.5% mortgages to people with 600 FICO scores. Already, FHA has contracted its own standards to require a 10% down payment for those with credit scores below 500.
Claims against the insurance fund have climbed, with roughly 7% of all FHA-insured loans now delinquent.
Given the FHA's September 30 fiscal year-end, this financial reality will come to light about the same time that other market forces run out of steam:
- Just as the $8,000 tax credit expires.
- Just as more of the stalled REO currently held on banks' balance sheets will be coming to market.
The culmination of all these factors means housing could see another leg down by early next year.