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New FHA Foreclosures Spike

Foreclosed California home
AP
Foreclosed California home

As lenders continue to try to modify delinquent mortgages or offer foreclosure alternatives, like short sales or deeds-in-lieu of foreclosure, the number of loans entering the foreclosure process are falling.

So-called “foreclosure starts” were down 2.6 percent in April from the previous month, according to a new report from Lender Processing Services.

But it’s not all good news.

FHA loans, those insured by the federal government, saw a huge spike in foreclosure starts, up 73 percent during the month, according to the LPS report. Loans originated in 2008 and 2009 are primarily to blame, although all FHA vintages did see some, albeit far smaller, increases.

“In 2008, when the loan origination market virtually dried up, the FHA stepped in to fill the void,” explained Herb Blecher, senior vice president for LPS Applied Analytics. “FHA originations tripled that year, and increased to five times historical averages in 2009. High volumes like that, even with low default rates, can produce larger numbers of foreclosure starts.”

Still the numbers mean a big hit to the FHA, which is already operating at well below its congressionally mandated two percent capital reserve ratio. “The 2008 vintage alone represents some $14 billion of unpaid balances in foreclosure, and the overall FHA foreclosure inventory continues to rise,” adds Blecher.

FHA took on a huge volume of loans in 2008 and 2009, “with relatively little oversight of underwriting and lending practices,” according to Guy Cecala of Inside Mortgage Finance. That has since changed of course, and FHA is aggressively going after lenders for certain claims and is pursuing large settlements. In the recent mortgage servicing settlement with the nation’s top five lenders, FHA got over $1 billion from the big banks.

“There is no question that claims—or losses—on FHA’s 2008 and 2009 business will be high,” says Cecala. “But if FHA is successful in getting large banks and FHA lenders to effectively cover those losses via large cash settlements, then the damage may be contained.”

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  • Diana Olick serves as CNBC's real estate correspondent as well as the editor of the Realty Check section on CNBC.com.

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