The increasing number of foreclosures means trouble for the Federal Housing Administration (FHA), an insurance fund unit of the U.S. Housing and Urban Development. Industry experts said that the FHA has been insisting that it does not need any bailout from the federal government. But they believed that the agency would likely need about $50 billion in capital infusion in 2010 to cover all the losses it incurred when borrowers, who took out loans guaranteed by the FHA, defaulted on their mortgages.

But what really scares industry experts is that the flood of FHA foreclosures would greatly affect whatever progress has been made towards the housing market recovery. It is expected that sales of repossessed houses will hit 1.9 million next year, an increase of 1.7 million from 2009. Before the collapse of the housing market in 2007, annual foreclosure sales were about half a million.

Industry experts said that one major reason for the anticipated increase in the number of foreclosure homes is the decision of lenders to hold off foreclosing on delinquent houses. Many lenders were struggling to identify the borrowers who will qualify for the federally-supported loan modification program. Experts are expecting that by the end of this year, lenders will come to realize that only a few borrowers are eligible to receive a loan modification.

Compounding the problem is the continuing increase in unemployment rate. It is predicted that unemployment will increase to more than 10 percent in 2010, pushing more homeowners to the brink of foreclosure. Also, the resetting of adjustable rate loans to higher rates is expected to result to more foreclosures. Industry economists believe that foreclosures will start to ebb by 2011, reducing to only 1.1 million if the economy will continue to improve.

Meanwhile, the worsening foreclosure problem is pulling down housing starts for single-family homes. From 2001 to 2007, housing starts rose consistently, hitting a record high of 1.7 million. Fast forward to 2009 and housing starts are expected to reach a bottom of half a million.

Industry experts said that the trends all conspired to push FHA foreclosures to the roofs and the agency may as well think about its position of not needing any help from the federal government.

However, while foreclosure properties in other metropolitan areas in the country have attracted buyers and investors, Detroit foreclosure homes remained on the market unsold for months or sometimes, even years.

And industry experts are anticipating more foreclosures to flood the market following a Census Bureau report that Michigan was one of the five states that saw their personal income declined dramatically.

The Obama Administration launched a program designed to help distressed homeowners who took out loans guaranteed by the FHA. So far, almost 850,000 borrowers of FHA-backed loans were behind on their mortgage payments or in some kind of foreclosure process. But the program is projected only to help about 45,000 troubled borrowers.

The program is geared towards struggling homeowners who failed to qualify for other loan modification initiatives of the federal government. According to industry experts, the decision of the Obama Administration to limit the number of assisted troubled FHA borrowers indicated that the government wants to protect the financial status of the agency.

In addition, the federal government wants to be realistic in its goals of providing help to troubled borrowers following the lack of results on its other mortgage modification initiatives.

Recently, the FHA disclosed that its financial reserves declined below the mandatory levels. The drop was the first in the agency’s 75-year history. But FHA officials insisted that the agency do not need a financial rescue despite the increasing default rates due to rising unemployment, dropping home prices and values and unscrupulous lenders.

Nationwide, nearly 17 percent of FHA-backed loan borrowers were delinquent or in some kind of foreclosure proceedings, compared with the delinquency rate of 13 percent for other loan types.

The FHA plans to request for annual audits and to increase lenders’ financial requirements. Additionally, it also plans to go after fraudulent lenders. FHA wants to help more troubled borrowers by modifying loans. However, its powers to modify more mortgages were hampered by the languishing economy.

Market data showed that majority of FHA borrowers are located in states such as Ohio and Michigan, where the main problem is rising unemployment rate rather than bad lending practices.

The Federal Housing Finance Agency’s Home Affordable Refinance Program encourages lending institutions to offer new loans to borrowers who have not missed any loan payment. Borrowers whose property value exceeds by 25 percent their total mortgage amount can avail of the foreclosure prevention program.

Terms under the initial program allows lenders to refinance a loan only if the total mortgage of homeowners does not exceed 5 percent of the values of their properties. The new version of the program would give borrowers interest rates that are a little higher than the best loan rates in the market.

Meanwhile, some changes will be made to the foreclosed homes HUD prevention program designed to help homeowners who are facing payment difficulties with their FHA-guaranteed mortgages.

The original version of the loan modification program of the FHA provides financial incentives to lenders to encourage them to modify mortgages to affordable payment terms.

Data from the LPS Applied Analytics showed that about 14.2 percent of FHA loan borrowers are at risk of turning their properties into foreclosed homes HUD. FHA Commissioner David Stevens explained that changes in the loan modification program would help distressed homeowners remain in their houses, make affordable payments and defer loan payments until property values have improved.

The FHA program allows reduction of loan payments to 31 percent of the homeowners’ monthly income. However, the adjustment will focus on the principal amount of the loan and not on the interest rate. This means that lenders may lower the outstanding loan principal to allow borrowers to make payments of as much as 30 percent.

Reduced payments will be made by borrowers on their FHA-guaranteed loans but they will be required to pay off the entire loan amount if they sell their properties or if the loans will be refinanced.

And unlike in the previous program wherein distressed homeowners have to miss three mortgage payments, the revised foreclosed homes HUD prevention program allows homeowners to receive a mortgage modification after missing only one loan payment.