As a Canadian I have to stand in ABSOLUTE AWE of the American mortgage system.
There are a "ridiculous" number of mortgage options out there. There are many options here in Canada too, but its much more regulated by the Canadian government to prevent booms and busts of the housing industry.
In the USA however it seems to me like its a bit of 'Wild West Free-for-All'. Mortgage lenders are like hired guns, bankers and thieves all at once. They're offering many different options and they're all looking to make a fast buck, often by targeting a percentage of people which are higher risk but can be charged higher interest rates.
In recent year the American mortgage market appears to finally be stabilizing, but just so long as you ignore loans backed by the Federal Housing Administration.
FHA loans are federally insured loans which, you guessed it, are covered by Washington in the event of foreclosure or serious delinquency.
While other mortgage loans are either bank held loans by financial institutions or insured by Fannie Mae/Freddie Mac, the FHA loans are operated separately and have very different rules governing who can get a FHA loan.
Lets start with some numbers:
Bank held mortgage delinquency is down 39% in the last year (from the 1st quarter of 2011 to the 1st quarter of 2012).
Fannie Mae and Freddie Mac delinquency is also down 14.7%.
Sounds great, right? Wait til you see the FHA numbers: 26.6% MORE delinquencies.
Furthermore FHA loans are growing in popularity. The reason is because they are much easier to get. All you need is apply for a loan of "less than $729,750" and qualify to have a debt-to-income ratio below 43%*. There are a couple other minor things you have to jump through hoops for, but otherwise its one of the easiest mortgage loans to qualify for in the USA even if you have had past debt problems.
* Actual number varies.
In one way FHA-insured loans are a good thing. They are keeping the American housing market stable for the moment by allowing people to buy or refinance their homes with less fuss.
But on the other hand FHA-insured loans are increasingly falling into foreclosure or serious delinquency, moving in the opposite direction of loans guaranteed by Fannie Mae and Freddie Mac or those held by banks, which are all showing signs of improvement.
The scary bit is that American taxpayers could ultimately be on the hook for FHA's growing number of troubled mortgages. The agency's finances are already on shaky ground, and additional losses from loans going sour could prompt the need for a federal bailout.
"We can't escape this one," said Joseph Gyourko, a real estate professor at the University of Pennsylvania's Wharton School. "This is an arm of the U.S. government." If a large enough share of the government-guaranteed loans, are delinquent for 90 days or more then we will see a jump in foreclosures which could prompt a federal bailout.
Note: The FHA itself doesn't provide the money for loans. It just insures them in the event that people fall into delinquency. Its a bit like having a co-signer on your mortgage. If you stop paying your mortgage, the co-signer is the one who ends up paying for it and eventually the home is foreclosed if the homeowners don't catch up on their payments.
Part of this problem isn't just the people applying for the mortgages. Its a few unscrupulous companies which are selling FHA-insured loans and are taking advantage of the less strict rules for approving mortgages.
Which begs the question, will be having another real estate bust in America in a few years from now when and if the FHA-insured loans cause a federal bailout? Or will such a bailout just be a band-aid measure which keeps everything afloat?
As to why Americans are defaulting more often on FHA loans my guess is its because they were given to people who probably weren't ready to be purchasing a house.
