Loan Modification

Why The FHA Should Go After BP

By Peter G. Miller

The April numbers from the FHA show a disturbing trend, an 80-percent increase in serious loan delinquencies.

In April 2009 the FHA had 293,275 loans that were at least 90 days behind. This April the number swelled to 527,504 — an increase of 79.9 percent.

The good news here is that the FHA mortgage program does a very good job in the “cure” department — that is, most delinquencies do not wind up in foreclosure and that means big claims against the reserve fund are avoided. In fiscal 2009, for example, the FHA annual report shows that “82.7 percent of the HUD-held loans that are 90 days or more delinquent were brought under control.”

The not-so-good news is this: If 17.3 percent of 293,275 delinquent loans are not cured it means government must deal with 50,737 foreclosure claims. If 17.3 percent of 527,504 loans are foreclosed it means there will be 91,258 claims and potentially billions of dollars in additional liability.

Unfortunately, the odds are that the delinquency rate is about to rise and the cure rate is about to go down.

The Gulf

It is very unlikely that HUD will be able to maintain the strong cure rate it has shown in the past. The reason is that in addition to the general economic downturn which has impacted the country since 2007, we now have the additional burden of the Gulf oil spill.

What’s happening in the Gulf of Mexico is a disaster, one which gets worse everyday. I know something about this because I used to write about energy and would actually go out and visit Gulf platforms. I’ve seen platforms, I’ve flown by helicopter over the Gulf multiple times and I’ve slept over on a platform.

The ecological problems we are now seeing are just a small hint of things to come. A way of life is being disrupted if not destroyed. And along the coast, empty hotel rooms and missing pay checks are beginning to pile up.

Compensation

The FHA is not the cause of any of this; it doesn’t drill and it doesn’t oversee those who do. But the inevitable consequences of what is now happening will impact the FHA mortgage program.

The FHA is an insurance plan and insurance only comes into play when premiums must be paid or when things go wrong. Things are now very wrong along large areas of the Gulf coast. Many people without paychecks and businesses as a result of the spill will lose their homes and some of those lost homes will create claims against the FHA.

The problem here is that it will be very difficult to re-sell foreclosed Gulf property when demand sinks, which means the FHA will not only face additional loan claims but those claims will result in bigger losses than might have been expected without the spill.

The FHA has an obligation to pay lender claims for loans that go bad, and the FHA has another obligation: It should be looking to BP for full compensation for all the additional claims and extra losses created by the spill. And it should settle for no less than 100 cents on the dollar.

Full post as published by FHA Mortgage Guide on June 15, 2010 (boomark / email).