Ending FHA’s Continuing Nightmare of Foreclosures - Corrected

By Edward Pinto, consultant to mortgage-finance industry, expert on the causes of the mortgagecrisis, former chief credit officer at Fannie Mae in the 1980s, and 10 years experience in affordablelending prior to 1984.

“Homeowners of a new and unattractive breed are plaguing the Federal Housing Administration these days. Known as "the walkaways," they are people who findthemselves unable to meet their mortgage payments—and to solve the problemsimply move out their belongings at night, drop their house key in the mailbox anddisappear.” Time magazine

This would be just another sad commentary on today’s foreclosure nightmare, but for the factthat it was published on July 27, 1962. The article goes on the blame FHA for a growing epidemicof foreclosures. As the chart nearby shows, 1961 was the first year in FHA’s history that annualforeclosure starts topped 1%. Unfortunately FHA, the nation’s first subprime lender, would goon to generate ever higher rates of foreclosure. FHA’s annual percentage of new foreclosurestarts has increased steadily, from 0.15% in 1951 to an estimated 4.4% in 2009 – a 30 foldincrease. It should come as no surprise that FHA’s foreclosure rate was high

before

the mortgagemeltdown began in 2007.

CHART 1

5.0%

Sources: FDIC, MBA, and Edward PintoA second chart nearby shows FHA’s volume and default experience by calendar of origination.Some defenders of FHA will say that the 2007 and 2008 defaults are the price that had to be paidonce FHA was thrown into the breach. However, the earlier books from 2006 and before are alsoperforming poorly.