FHA gaining in latest September 2008 Ventura County LTV chart

(click to enlarge)

This is the Loan to Value chart for Ventura County September 2008. The left axis represents the purchase price of a home and the bottom axis represents the LTV of the loans on the homes at purchase. So a dot at $300,000 and 80 LTV would mean that a borrower put $60,000 dollars down on a $300,000 home and the loans on the home total $240,000. The higher the LTV the more aggressive the loan is considered to be. By click on the graphic you will notice the almost solid red line at around 97% LTV. This represents FHA singular dominance in the aggressive lending arena. The shaded blue area represents where private mortgage insurance is bring eliminated for conforming loans (Loans under $417,000). The shaded green area represents where private mortgage insurance is being eliminated for "Jumbo conforming" loans (those under the jumbo conforming limit which was $729k and is being lowered to $598k January 1st, 2009). In these two shaded areas the blue dots (conventional) should disappear by early 2009 and only red dots (FHA) should remain. The pink line represents the old jumbo conforming limit and the green line represents the new jumbo conforming limit. The loans in between these two lines will most likely not be made after January 1st. Or if they are made they will be made at much higher rates than those under the limits shown.

The WSJ had an article on the FHA tonight that ties with what the chart is telling us is happening in the marketplace (emphasis added) :

The FHA, which insures lenders against defaults on home mortgages that meet the agency's standards, saw its share of new mortgages increase to 26% in this year's third quarter, up from 3% for all of 2007, according to Inside Mortgage Finance.
Some worry that the growth has come too fast, especially as the FHA expands rapidly into the most risky markets and insures bigger loans.
...
Still, some housing experts worry that an outsized share of the FHA's new business is coming in these high-cost housing markets. "It's getting into markets that are a lot riskier than it has in the past," says Ann Schnare, a housing consultant.
...
Private mortgage insurers are more restrictive. For instance, Genworth Mortgage Insurance Corp. requires down payments of at least 10% in areas with falling home prices and 15% if the loan is larger than $417,000.
...
As the private market imposes much tougher standards, the danger is that the riskiest loans will flow to the FHA, says Joe Rogers, an executive vice president in the home mortgage business of Wells Fargo & Co.

Financing and the home loan market are a slow moving train, the fate of whether or not some of these decisions made to be aggressive in the face of a falling market won't be decided for some time now. But if the FHA is wrong it is the taxpayer that will be bailing them out. Business Week had an article on FHA and how some of the brokers were gaming the system just like during the subprime boom. If enforcement isn't stepped up to police the originators this issue could blow up even bigger than expected. Putting a large number of people who clearly have an unreasonable expectation for price appreciation for homes into instantly underwater homes during a downward economy sure doesn't seem like a good idea. Defaults on these originations should reach very high levels and I can imagine a congressional hearing sometime in the future when the taxpayers will be asked to pay for this when some FHA official will be saying, "Nobody could have possibly seen this coming".