Few mortgage executives would dispute that FHA home loans provide stellar options for home-buying and refinancing. The story of the collapsed of mortgage markets has been told.  Unfortunately, the effects are still hindering the housing recovery for most of the nation.  This organization’s mission is to bundle and sell home mortgages insured by the Federal Housing Administration (FHA). These mortgage-backed securities are backed by federally insured or guaranteed loans. FHA’s spectacular growth means the organization now insures $560 billion in mortgages.  FHA loan forecasts predict that by year’s end, Ginnie Mae’s mortgage exposure will top $1 Trillion. Along with Fannie Mae and Freddie Mac, Ginnie Mae provides some federal taxpayer guarantee for nearly 9 out of 10 new mortgages in the US. Moreover, the scope of the federal guarantees is the heart of the problem.

What are some of the characteristics of the FHA mortgage insurance program? The FHA loan program features low down payment loans to homeowners of below average to poor credit ratings. The profile of such a lender should be familiar to all and we came to know these loans as sub-prime home loans. The very type of loan that toppled Fannie Mae, Freddie Mac, and Countrywide Financial is back in vogue! Statistically, 7% of FHA’s loans are in default and 13% are delinquent by more than 30 days. The reserve fund backing the insured loans is now 3% implying a leverage ratio of 33%, which is dangerous territory. Refinancing programs approved by Congress add to these woes as hundreds of thousands of borrowers presently unable to pay mortgages move to FHA loan programs. This includes loans in the sub-prime and other exotic realms. Part of the refinancing program includes mortgage reductions of up to 30% to mitigate imminent home foreclosures. Naturally, the 30% home loan forgiveness must be taxpayer financed. There are cases of borrowers with 25% negative equity qualifying for FHA home refinancing under this program. The latter case is especially troubling since one has to ask how many banks would willingly offer FHA refinance terms to a borrower when their collateral is 25% less than the loan amount? Is it even a smart proposition for a borrower to enter into such a loan? How many of these borrowers will default even with new mortgage terms?  In the story, a former Fannie Mae executive noted the FHA might require a bailout (a familiar term lately) due to potential losses of $54 billion.  So consider that one of the pillars of the US mortgage industry is essentially bankrupt.