The high number of Los Angeles foreclosure listings may grow further if more homeowners who took out loans guaranteed by the U.S. Federal Housing Administration become delinquent and ultimately go into foreclosure.
According to a report from the Mortgage Bankers Association, the percentage of delinquent FHA home loans or mortgages already in foreclosure has reached 8 percent of all FHA home loans as of June 30.
After the housing meltdown, when mortgage lenders were unable to provide home loans, the FHA emerged to prop up the market by insuring home loans to encourage lenders to make loans. It provided guarantees for borrowers who are able to put down only 3.5 percent of the sales price.
Since January, the FHA has already guaranteed almost 2 million home loans worth about $328 billion. Last year, it guaranteed nearly 22 percent of all new home loans, a sharp increase from approximately 6 percent in 2007.
With this level of guarantees, several legislators are concerned that the low down payment required by FHA may again attract people with unstable finances to buy homes that they cannot afford to pay in the long term. They worry that it will cause the same level of foreclosures experienced over the past years.
This October, the number of homes in Los Angeles foreclosure listings has surpassed 11,400, based on data from an online real estate research firm. Majority of all homes available for sale in Multiple Listing Services were foreclosures, according to the research firm.
This level of foreclosures is what legislators are worrying about. In Los Angeles, limits for home loans guaranteed by FHA have been pushed up to $729,750, increasing the number of jumbo loans going into foreclosure.
Some lawmakers are now proposing that the FHA raise its 3.5-percent down payment limit to 5 percent so homeowners would have more equity in their homes.
Based on many foreclosure reports throughout the country, foreclosures involving higher-priced homes have been increasing as homeowners lose their high-paying jobs and as small business owners close their operations. Failure to find lenders willing to refinance home loans and business loans is also a major cause of foreclosures in the higher end of the housing market.
According to Dean Baker of the Washington think tank Center for Economic and Policy Research, FHA loans soared in popularity over the past year because mortgage banks stopped issuing subprime loans and required bigger percentages of down payments.
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