With the housing market in turmoil for the past year, the Federal Housing Administration, or FHA, has come to the rescue of many. It's now responsible for about a third of new mortgages, 10 times more than just a few years ago. And as the federally insured loan program has grown, so has its rate of defaults. The FHA is expected to acknowledge soon that its insurance reserves have slipped below a critical threshold. NPR's Tamara Keith reports.

TAMARA KEITH: Not everyone can get a mortgage anymore. The days of, if you can breathe, you can get a loan, are over. But it might be hard to tell from watching the ads that are out there.

(Soundbite of television commercial)

Unidentified Man (Announcer): �mortgage bank. We're authorized by the federal government to offer FHA loans to homeowners with less than perfect credit.

KEITH: This ad comes from a company called Premium Capital Funding, LLC. It goes by the named Topdot Mortgage.

(Soundbite of television commercial)

Unidentified Man (Announcer): �and your credit score may not even be a factor. Applying is easy. Call then number on your screen�

KEITH: According to FHA data, over the last two years, Topdot's loans defaulted at nearly two and a half times the national average. In some cases, the borrowers never made a single payment. FHA commissioner David Stevens says any FHA lender whose default rate is more than 150 percent of the norm has a problem.

Mr. DAVID STEVENS (FHA Commissioner): An institution that has that high a compare ratio is something that would be very concerning to me, and will be one that we're looking at more closely going forward. And if they don't perform at the levels that we would expect and that the taxpayers would expect, we need to make sure that they either improve or they get out of the program.

KEITH: Topdot officials declined to be interviewed for this story, but in an email, a company lawyer said Topdot is working to improve its loan performance by - among other things - adopting more stringent credit requirements. But Topdot isn't alone. There are more than 900 small, FHA-approved lenders that experts say have unacceptable default rates. Guy Cecala is the publisher of Inside Mortgage Finance.

Mr. GUY CECALA (Publisher, Inside Mortgage Finance): The FHA business has been like a magnet for smaller lenders looking to carve out niches in loans that have lower down payments and slightly lower underwriting requirements.

KEITH: FHA requires only 3 and a half percent down, and credit score requirements are flexible. Some lenders are taking full advantage of that flexibility, and some are probably breaking the law. It reminds Cecala of the subprime mortgage market of the past.

Mr. CECALA: You know, in the current mortgage market environment, where we kind of have plain-vanilla mortgages, there's not a lot of opportunity for the small, entrepreneurial - is the best way we can describe it - company who wants to make a niche for themselves in the mortgage market. FHA is one of the only avenues still left.

KEITH: A mortgage company can follow all of FHA's guidelines to the letter and still issue some really bad loans, loans that are destined to fail. But now, FHA officials are making it clear they aren't OK with that, says Brian Chappelle with Potomac Partners, a mortgage industry consulting firm.

Mr. BRIAN CHAPPELLE (Potomac Partners): The message that's being sent is that there is a new sheriff in town at FHA, and that they are going to pursue investigations to see just what the causes are for these high default rates. Where in the past, I don't think a lot of people felt that they really had anything to worry about if they had a high default rate.

KEITH: FHA recently helped shut down one major lender and now, it's going after another: Ideal Mortgage Bankers, also known as Lend America. The company is fighting the government's efforts to kick it out of the FHA program and said, in a statement, it plans to continue to provide affordable financing for those borrowers in need. And the reality is, these companies with unacceptably high default rates are on the margins. Guy Cecala says most of FHA's defaults are being driven by the recession.

Mr. CECALA: They've made loans during a period when housing prices have been declining, so a lot of the loans are underwater. It's not like anybody's really immune from this, so it would be expected that FHA would take some serious losses in this kind of economy and environment.

KEITH: FHA officials say they're open to tightening the loan program's rules, but they say there's a careful balance to strike. If the rules are too tough, some buyers would be pushed out of the market - buyers that are needed to help the housing market recover.

Tamara Keith, NPR News, Washington.

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