FHA-Backed Loans: The Next Subprime Shoe To Drop?

There is an interesting Business Week article regarding the increased use of FHA-backed loans that are being used to continue lending to borrowers who once again may be unable and unlikely to pay back their loans. Inside Mortgage Finance (a research / newsletter firm) estimates that bad FHA-backed loans could end up costing taxpayers more than $100 billion over the next five years. As subprime loans have dried up, the FHA loans have become the only source of lending for many at-risk borrowers. Congress and the current administration have been encouraging lenders to apply for FHA guaranteed loans in order to access the current FHA loan reservoir, but the banks and loan quality are not being monitored, allowing the funds to be loaned to the very same borrowers that had trouble paying before, and which of course began the chain reaction of defaults we are now witnessing. To make matters worse, the government guarantees are creating incentives for banks to buy the FHA loans and securitize them, in what may become another bad dream realized. Hopefully the markets will wake up and be spared in a year or so when the new "FHA-insurance Armageddon" is suppose to hit - but past history is not encouraging.