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Why You're Safer With A Government Mortgage

The government has new mortgage information and guess what? It turns out that the use of VA mortgages has more than doubled since the financial crisis began -- and that those who use VA loans have fewer foreclosures than any other group of borrowers.

This is a very big deal because the foreclosure crisis would be far worse had it not been for the use of FHA and VA mortgages. Now, for the first time, we can begin to see how government-insured home loans have prevented the fall of the housing market from being much worse.

According to the Federal Housing Finance Agency real estate prices as of July have tumbled 18.4 percent since the April 2007 peak.

As prices have dropped the use of mortgages has changed. So-called "affordability" loan products are no longer available. Lenders who want to offer "non-traditional" loan products must now set aside a reserve equal to 5 percent of the mortgage amount under Wall Street reform, a deal almost no lenders are taking.

Why? That 5 percent is better used for loans and other purposes so few if any lenders are making option ARMs, interest-only loans or allowing the use of no-documentation loan applications.

What lenders are doing is offering the loans encouraged under Wall Street reform. Basically, that means VA, FHA and conventional mortgages with three or fewer points and a full-docs loan application.

Borrowers Flock to Government Backing

Meanwhile, on the borrower side of the equation, there's no doubt that few people want to finance with risky loans that allow principal balances to grow or permit massive monthly cost hikes.

The result is that FHA and VA mortgage use has soared.

"The FHA's share of first-lien loans increased from 7 percent in 2007 to 37 percent in 2009 and 36 percent in 2010," according to the Federal Financial Institutions Examination Council (FFIEC).

Looking at the numbers from nearly 8,000 mortgage lenders, the Council reports that "first-lien lending for home purchases backed by Veterans Administration (VA) guarantees also has increased markedly, although VA-backed lending is much smaller in scope than FHA-backed lending. The VA market share of first-lien home purchase loans increased from 2.7 percent in 2007 to 6.7 percent in 2009 and 7.0 percent in 2010."

The increasing use of government-insured loans is important for a very simple reason: Fewer people default with FHA and VA mortgages, meaning such financing is central to restoring the housing market and with it the national economy.

Figures from the Mortgage Bankers Association show that the overall percent of loans in foreclosure -- also known as the foreclosure inventory rate -- reached 4.43 percent in the second quarter.

The catch is that not all types of loans did equally well (or bad).

VA Loans Tops in Safety

Prime fixed loans had a foreclosure rate of 2.56 percent, while prime ARMs were at 9.16 percent. This compared with subprime fixed loans (11.01 percent) and subprime adjustables (22.23 percent).

And what about government-insured loans? FHA loans had a foreclosure rate of 3.24 percent while VA financing lead the league with a foreclosure rate of just 2.30 percent.

In other words, people who took out government-insured loans were less likely to default than prime or subprime borrowers. Given the tough times we all now face, that's good to know.