As many as one in seven families across America with Federal Housing Administration-backed mortgages will lose their homes to foreclosure in coming years, according to a landmark study by a former executive vice president and chief credit officer at Fannie Mae.
The FHA mortgage program is intended to help low and moderate income families, and first-time purchasers, to buy homes and build equity, but American Enterprise Institute Resident Fellow Edward J. Pinto said the federal agency is "engaging in practices resulting in a high proportion of low- and moderate-income families losing their homes."
Pinto's study focused on previously unavailable mortgage, credit and other financial data at the zip code level for 2.4 million mortgages insured by FHA during 2009 and 2010. The study thus examined three-fourths of the 3.45 million loans insured by FHA during those two years.
"Across the country, 9,000 zip codes with a median family income below the metro area median have projected foreclosure rates equal to or greater than 10 percent. These zips have an average projected foreclosure rate of 15 percent and account for 44 percent of all FHA loans in the low- and moderate-income zips," Pinto said.
The FHA's emphasis on approving 30-year mortgages with low down payments for buyers with low credit scores and/or high levels of consumer debt encourages them to "make risky financing decisions" that often end in foreclosures. Pinto said failure rates in excess of 10 percent are common among such mortgages.
"This sets up for failure the very families and communities it is the FHA's mission to help. As a result, too many low- and moderate-income borrowers see their hope for the American dream turned into a nightmare," he said.
The coming surge in foreclosures is not unknown to federal officials, according to Pinto. Projections by FHA last year found that 9.6 percent, or about 330,000, of the mortgages it insured during 2009 and 2010 "will ultimately be foreclosed upon or otherwise result in a claim against FHA's insurance fund," he said.
The current rate of foreclosure on such mortgages is 19 times higher than it was in 1954. "This is not your great-grandmother's FHA," Pinto said.
Pinto's study is available here on the AEI website and includes a number of interactive graphics displaying foreclosure and other data by zip code, as well as projecting future trends by zip code.