What the FHA Meltdown Means for Real Estate Investors

What happens if FHA goes bankrupt?

New fears about the financial solvency of the FHA are being raised as loan delinquency soars. So how bad is it really and what does this mean for the future of real estate investing?

CNN Money recently sounded the alarm bells as newly released data revealed a 26.6% rise in 90 day plus delinquencies among FHA loans between the first quarter 2011 and the end of March 2012. However, this doesn’t even take into account the 70%+ spike in foreclosure filings the FHA was accused of hiding in April this year.

Not only are more loans late, more being foreclosed on and as much as 50% of modified loans re-defaulting but the FHA is quickly running out of emergency reserves. Congress mandated the agency hold 2% of guarantee amounts to be held in reserves by FHA but instead of shoring up the gap these reserves have crashed in the last three years, down from 0.53% to just 0.24% at the end of last year.

If the FHA goes belly up that means tax payers will likely be footing the multi-billion dollar short fall but that isn’t the worst of it. Now analysts are using this situation to call FHA loans high risk and are calling for an even further tightening of lending standards including larger down payments and tougher credit score requirements. While the opposite is clearly needed to continue to fuel a housing recovery and the current woes are the result of much wider factors, not just underwriting guidelines this could mean fewer loan options in the near future.

Real estate investing pros need to be prepared for this event and adjust their strategies accordingly. However, perhaps more importantly in the short term it signals a huge opportunity to market to distressed FHA borrowers with offers to buy their homes at big discounts. This isn’t that hard to do with plenty of data available from lead providers on the type of loans homeowners have, what their payment status is and who their lender was.