The number of riskier mortgages is growing, which is increasing delinquencies—albeit slightly—and raising concerns about defaults, USA Today reports. Federal Housing Administration loans, which typically require down payments of 3 percent to 5 percent, are at the center of most of the concern.
FHA-backed loans are becoming more available through non-banker lenders, who have in some cases eased credit standards compared to banks.
While still far from the concerns of the mid-2000 subprime mortgage offerings, some analysts are sounding a cautious alarm that a bigger problem may surface if more precautions aren’t taken. The share of FHA mortgage payments 30 to 59 days past due averaged 2.19 percent in the fourth quarter, up from 2.07 percent the previous quarter, according to CoreLogic and FHA data. That is still down from 3.77 percent in early 2009, but the overall trend over the past year has been edging higher.
"We have a situation where home prices are high relative to average hourly earnings and we're pushing 5 percent-down mortgages, and that's a bad idea," Hans Nordby, chief economist of real estate research firm CoStar, told USA Today.
FHA loans comprised 22 percent of all mortgages for single-family home purchases in fiscal 2016, according to the FHA. The share has been steadily climbing over the last few years, but still remains far below the 34.5 percent peak in 2010.
Many of the nation’s biggest banks have pulled out from the FHA market in the aftermath of the housing crisis. As such, more non-bank lenders, who tend to face less regulation from government agencies like the FDIC, are stepping in. Indeed, non-bank lenders comprised 93 percent of the FHA loan volume last year, according to Inside Mortgage Finance. The average credit score of an FHA borrower dropped in the fourth quarter to 678, which is way below the 747 average for non-FHA borrowers.
The big concern to many economists is if home prices peak and then decrease, homeowners who made a down payment of just 5 percent and are less creditworthy may be more likely to default.
But non-bank lenders say the loosening of FHA standards is a welcome sign and not one to fear.
"I don't have any concerns about" a potential rise in delinquencies or defaults, Bill Emerson, vice chairman of Quicken Loans, the largest non-bank lender, told USA Today. "In the last three, four years, consumers have more access to credit …. and all of a sudden it's, 'Here we go again.'" Likening the mid-2000's meltdown to a 100-year flood, he added, "I don't believe we're anywhere close."
Source: “Concerns About Riskier Mortgages Are Sprouting,” USA Today (March 12, 2017)
