FHA Foreclosures Soared in April

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FHA foreclosures rose 73 percent in April, driven primarily by defaults of loans made in 2008 and 2009 vintage loans, raising new questions about the solvency of the popular government program, which accounts for about a third of all new mortgages.

New foreclosures on FHA-backed loans rose to 63,126 in April from 36,311 a month earlier, mortgage-data provider Lender Processing Services Inc. (LPS) said yesterday.

"In 2008, when the loan origination market virtually dried up, the FHA stepped in to fill the void," explained Herb Blecher, senior vice president for LPS Applied Analytics, which released the data of FHA foreclosures in its May Mortgage Monitor Report. "FHA originations tripled that year, and increased to five times historical averages in 2009. High volumes like that, even with low default rates, can produce larger numbers of foreclosure starts. That represents a lot of loans to work through – the 2008 vintage alone represents some $14 billion of unpaid balances in foreclosure, and the overall FHA foreclosure inventory continues to rise.

The FHA immediately challenged the data, saying its own numbers showed an 11 percent drop in April foreclosures to 18,975. LPS may have erred extrapolating numbers from its database of information on 40 million loans, said an FHA spokesman.

The LPS report showed that defaults for loans written from 2004 through 2010 rose in April, but the largest spike was in loans originated in 2008 and 2009. Since the 2008-2009 period, when FHA lending exploded as private lenders pulled out of the housing market, reaching nearly 2.5 million loans, FHA has instituted higher lending standards, including higher credit requirements and increased mortgage insurance premiums to reduce its risk. As a result, default rates on loans written after 2008 have improved significantly, according to LPS.

Though FHA foreclosures are still far below private lenders as a percentage of total inventory, the sheer dollar volume of LPS figures could have a significant implications for the agency's portfolio, especially if the trend continues.