Cash strapped home buyers have quietly shifted to financing their home purchases with FHA insured loans since the crisis accelerated in 2007 after pocket lint was discount as sufficient collateral to secure a mortgage. The reason for the alteration in loan volume is both disturbing and simply reflects the reality that American households are still broke and addicted to debt.
The FHA total book value of loans has soared to over $1 trillion. These are loans made with 3.5 percent down payments and carry laxer lending standards. So it should be no surprise that defaults for FHA insured loans are hitting record levels. The mission of the FHA was to make homes more affordable to lower income households which ironically are now a larger part of the U.S. population. However the FHA has been used as a conduit to increase loans in housing markets where bubbles are still persistent.
The median U.S. home prices is $163,000 so to make a FHA loan for say $500,000 makes absolutely no sense and has no resemblance of a low income market. Sort of like the real estate industry claiming option ARMs were for doctors and actors that simply did not want to document large amounts of income, which consequently never materialized and ended up in the hands of aspiring Joneses purchasing million dollar homes on $50,000 to $100,000 annual incomes. Keep in mind simply by loan and market size the FHA secured loan portfolio has increased largely from infiltrating bubble markets like California under the guise of helping lower priced areas.
Let us look at the absurd increase of FHA insured loans since the crisis started.