Real estate agents love FHA loans. These 3.5% down payment loans have kept the housing market on life support and allowed them to keep collecting commissions over the last few years. Of course, taxpayers are ultimately responsible for picking up the bill if the housing market continues to collapse and default rates rise. It looks as if that day is nearing.
Today, news is out via WSJ reporter Nick Timiraos that the FHA's reserves are far below their legal limit. Take a look at the graph to the left. Notice that over 15% of loans originated in 2008 are already 60 days delinquent. More losses are surely coming and taxpayers will be picking up the bill.
One of the tipping points for sending the housing market into another tailspin will be the removal of government support from the market (90% of new mortgage loans are currently insured by the federal government). A key driver in this change coming about will be public backlash against the FHA once taxpayers realize they are on the hook for the losses.
At that point expect the minimum down payments to increase (something real estate agents are fighting against vehemently). When people have to start putting 5% or, dare we say, 10% down expect housing to take another step down across the board. Looking at the abysmal state of the FHA presented in the graphs from the WSJ, I'd say that day is closer than most expect.