Bloomberg News: FHA Underestimates Number of Mortgage Delinquencies

The Federal Housing Administration has underestimated the number of delinquencies on loans originated from 2007 through 2009, Bloomberg News reports citing a study released last week by New York University and the Federal Reserve Bank of New York. 

More than 40% of FHA’s loans during that time period will be delinquent within five years, Bloomberg writes. 

The FHA, part of the Department of Housing and Urban Development, underestimates risk because it counts refinanced mortgages as successful loan terminations, even though the same borrowers are refinancing into new mortgages backed by the government insurer, according to the paper published on the website of the National Bureau of Economic Research. The researchers computed the risk of default by linking all of the loans connected to each borrower.

“Having such a very large fraction of the people who borrow from you become delinquent could never be regarded as good public policy,” said Andrew Caplin, a professor of economics at New York University and one of the study’s authors.

The study is the latest in a series of critiques by Caplin and others of the way the FHA tracks its financial health. The agency, which took on more loans as private insurers left the market in the aftermath of the 2008 financial crisis, guarantees about $1.1 trillion in home loans.

HUD spokeswoman Tiffany Thomas Smith declined to comment in detail because the agency has not yet reviewed the study. The FHA has defended its financial performance data and stressed that the quality of its loans is improving.

Read the original Bloomberg News article

Written by Elizabeth Ecker

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