Government Responsible for New “Crush” of Home Foreclosures?

According to the MSN.com article, New wave of foreclosures coming, the government’s efforts to help citizens obtain a piece of the American dream – home ownership — may in fact be doing the opposite (pushing more into foreclosure). How?

Via the Federal Housing Administration (FHA), the government has given home loans to buyers that traditional banks wouldn’t touch with a ten foot pole. With tightening credit markets and the foreclosure crisis still raging, many banks have abandoned zero percent down loans, and/or giving home loans to those with less than perfect credit.

But, the FHA hasn’t. They back loans to those with less than stellar credit, and require less of a down payment (eg, 3.5%). Traditional lenders in today’s market, by comparison, may require a 20% down payment.

And, critics argue, actions like this by the FHA is what has been artificially propped up the housing market for the last year or so.

Now, the fallout is already starting. Proof?

About 9% of FHA borrowers have missed at least three payments (up from 6.5% a year ago), and experts say that means a new wave of home foreclosures is coming.

By using lower home loan qualification standards, the types of buyers being put into homes back by the FHA are much more likely to default. And, if this sounds familiar, you’re probably right.

This kind of lending* by the FHA (similar to subprime mortgage) is what got us into this mess in the first place. But apparently we didn’t learn our lesson (or at least the government didn’t). According to the Washington Post article, Rising FHA default rate foreshadows a crush of foreclosures:

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.

So we’re just at the beginning of the home foreclosures to come, if this holds true (and data suggests that it does).

Finally though, the message may be sinking in as the FHA has tightened its lending guidelines, pushing the down payment requirement up to 10% from 3.5, and limiting the amount that sellers can kick in. As one journalist noted, it means those wanting to purchase a home now have to put “some skin in the game.” This makes it harder to walk away when things get tough.

And, this makes perfect sense. After all, if you didn’t come to the table with any money (or very little), you’re much more likely to walk away. But, if you had to save $15,000 for a 10% down payment — and it took you three or four years to do so — and you have to come up with another $2,000 or so for closing costs, then you’re much less likely to let your home go into foreclosure.

The memories of the overtime you worked, the second job you took on and the time you sacrificed away from family and friends will give you the kick in the pants you need to do “whatever it takes” to prevent foreclosure.

While it looks like we are stuck in this home foreclosure crisis for a few more years to come it looks like we, the American public, are finally learning our lessons — and so is our government. One day, hopefully, the home foreclosure crisis will be a history lesson future generations can learn from. But for now, we struggle on through it.

*Note: The FHA is not a lender, but it insures lenders when mortgages go sour.

Get full details on why more home foreclosures are on the way.

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Copyright © 2010 Yuwanda Black for Foreclosure Business News. Article may not be reprinted or reproduced in any manner without the express, written consent of the author.