Refinancings Becoming Default Woe for FHA

Refinancings are becoming a higher proportion of Federal Housing Administration early defaults, as the performance of FHA purchase mortgages improves, according to Potomac Partners, a consulting firm. "Refinancings are 44% of FHA originations and 70% of its early defaults and claims," said Potomac partner Brian Chappelle. Historically, refinancings have performed much better than purchase mortgages. But that changed in the fourth quarter of 2008, according to FHA Neighborhood Watch data, when the percentage of defaults and claims (two years after origination) on refinancings hit 4.38%. At year end 2009, it was up to 5.9%, compared to 5.05% for all FHA single-family loans. The good news is that purchase mortgages are performing well and FHA experienced a 24 basis point decline in the total default and claim rate to 4.81% as of February 2010. "To have early defaults decreasing is really encouraging," Mr. Chappelle said.