The Federal Housing Administration's high loan default rates are concentrated in 10 metropolitan statistical areas, and they turn out to be very similar to those who also faced distress during the Great Financial Crisis, according to a study by the American Enterprise Institute.
These metropolitan areas, partially ranked by the number of past due loans, are Atlanta (42,268), Houston (40,147), Chicago (28,792), Dallas (22,302), Washington, DC (20,285), Baltimore (17,851), Riverside, California (17,622 ), San Antonio (14,491), Fort Worth (12,866), and Philadelphia (12,490).
“It's a double punch that occurred despite the fact that the pandemic was an entirely different event. Many of these areas – which are usually low income and minority communities – have not yet fully recovered, ”said Ed Pinto, AEI Senior Fellow and director of the institute's residential center. Pinto wrote the study together with Tobias Peters, a research fellow and director of the institute.
The study's results suggest that FHA officials and service providers should consider ways to avoid worsening hardship in these areas as a wider range of credit workouts resume within certain parameters this summer, said Pinto.
For its ranking, the institute selected areas that either had total default rates of over 16% or default rates of over 90 days of more than 10%. MSAs were also required to have an FHA percentage greater than 12.5% based on the number of loans. (These percentages include, and largely reflect, temporary pandemic-induced payment suspensions known as deferrals. Deferred loans may re-develop as borrowers recover from the hardships associated with coronavirus.)
The AEI also included metropolitan areas that did not meet the previous criteria, but had both an FTA share and an overall failure rate of over 12%. Subsequently, the metros were ranked according to the number of loans with late or suspended payments. The institute calculated the percentage of FHA loans based on the numbers from the Home Mortgage Disclosure Act of 2019 and examined recent data on delinquency as of May 31 from the FHA's Neighborhood Watch program. For example, analysis of the greater Atlanta area shows that the region has 17.4% overdue loans, a default rate of 12.8% over 90 days, and an FHA share of 21%.
The average default rate for FHA loans was 14.7% in May. The average default interest rate over 90 days plus was 10.5% in the same month.
Loans insured by the Federal Housing Administration, a branch of the Department of Housing and Urban Development, tend to have relatively higher default rates as the program serves lower-income and first-time buyers. The FHA uses the Neighborhood Watch program to monitor and compare mortgage lenders' credit performance versus their competitors and identify potential risks to their insurance funds.
The way in which the boundaries of metropolitan statistical areas are set has resulted in the omission of some regions where both the proportion of FHA and failures are high, Pinto noted, citing Miami as an example of this.