When house prices drop, falling values have ripple effects on the economy. Jobs are lost, credit becomes difficult to obtain and people are forced to make tough decisions regarding what monthly bills they can afford to pay.

And increasingly, it appears as if many people are opting to not pay their mortgage — whether by choice or necessity.

According to the Wall Street Journal, people who have an FHA loan are defaulting on their mortgage at consistently higher rates.

Loan defaults crossed the 9% mark in December, ending the year at 9.12%, up from 6.82% one year earlier and 8.94% at the end of November.  Through 2009, the agency had insured 5.8 million loans worth $752.6 billion, or a 24% increase from one year ago.

This number really doesn’t surprise anyone – FHA has made a number of significant moves to increase revenue at the agency, including:

• Changing FHA down payment and credit score requirements
• Investigating lenders with higher than average default numbers
• Reducing allowable seller concessions for new FHA loans
• Raising mortgage insurance premiums

But according to the WSJ article, that may not be enough:

The FHA appears to be outrunning that problem for now. Last week, the Obama administration’s proposed budget said the agency would generate enough revenue from new business to generate a $6 billion overall profit, even though losses in 2011 are expected to hit $19 billion, up from $8 billion last year. The FHA, which has seen defaults rise sharply on loans that it guarantees, doesn’t make loans but instead insures lenders against losses.

Whether or not the moves that FHA has made will be enough to avoid a complete overhaul of the FHA system, I suspect that over the summer many things may change — including the FHA loan program. I have heard talk of getting rid of Fannie Mae and Freddie Mac and if this happens, I suspect there will be a complete overhaul of how housing in America is financed.