Not just "rogue players on the margin"

Today's must read housing market news comes via this Washington Post report on the still rising delinquency rate for FHA insured mortgages, what Toll Brothers CEO Robert Toll dubbed a "train wreck" a few months back and what others refer to as "today's subprime".

The share of borrowers who are falling seriously behind on loans backed by the Federal Housing Administration jumped by more than a third in the past year, foreshadowing a crush of foreclosures that could further buffet an agency vital to the housing market's recovery.

About 9.1 percent of FHA borrowers had missed at least three payments as of December, up from 6.5 percent a year ago, the agency's figures show.

Although the FHA's default rate has been climbing for months and eating into the agency's cash, the latest figures show that the FHA's woes are getting worse even as the housing market shows signs of improvement. The problems are rooted in FHA mortgages made in 2007 and 2008. Those loans are now maturing into their worst years because failures most often occur two to three years after a mortgage is made.

Once again, this is a case where the historians are going to have a field day...

When private sector mortgage lending started to shut down back in 2007, in swept the government to "fill the void" only to find that, a few years down the road, they've failed to address any of the fundamental problems associated with the nation's housing market.

And, no, the fundamental problem is not that prices are falling.

It's that they went too high in the first place.

Of course, now that the Federal government runs nearly the entire mortgage market, look for more borrowed money to be generously applied to these latest symptoms.

If the trend continues and the FHA's cash reserves are exhausted, the federal government would automatically use taxpayer money to cover the losses -- a first for the agency, which has always used the fees it charges borrowers to pay for its losses.

As these loans from 2007 and 2008 go bad and clear off of the FHA's books, agency officials said, losses are expected to taper off, aided by the housing market's anticipated recovery and an influx of more creditworthy borrowers, who have flocked to the FHA's home-buying program in the past year.

Agency officials said they have cracked down on poorly performing lenders and announced higher qualifying fees for borrowers. On Monday, the agency projected that the fees should generate $5.8 billion in fiscal 2011, up from $2 billion this year. That would fatten the FHA's cash cushion, used to cover unexpected losses.

For now, just about every major measure of the agency's financial health is worsening.

The FHA does not make loans but insures lenders against losses. And claims have already spiked. The agency had to pay out on 47 percent more loans in October and November than in the corresponding period a year earlier, according to an FHA report.

The number of loans in foreclosure, including those that have not yet been billed to the agency, has also increased. They were up 26 percent in the last quarter from a year earlier.

FHA Commissioner David H. Stevens, who joined the agency in July, flagged his agency's troubles with the 2007 and 2008 loans in October, when he told a House panel that "rogue players on the margin" immediately migrated to the world of FHA lending after the subprime mortgage market collapsed.

Their aggressive lending tactics attracted borrowers with unusually poor credit profiles to the FHA. "That clearly impacted the books of business in 2007 and 2008, and that performance data is showing up very clearly in today's balance sheet," Stevens said at the time.

Towards the end of the story, former Freddie Mac official Ann Schnare noted that the audit included only those loans for which the FHA has already paid claims, not the mounting number of loans where the borrowers have missed payments and the mortgage is in one stage or another of default.

Things are probably going to get much worse for the FHA - at least as long as unemployment stays high and home prices don't rebound in a meanginful way.