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.

Beginning this spring, prospective FHA borrowers will face stricter standards and more upfront costs when the time comes to purchase a home.

The Federal Housing Administration this week announced a series of changes designed to strengthen its financial standing and weed out vulnerable borrowers.

The FHA has assumed an increasingly vital role in the last two years, propping up the housing market amid a vicious downturn. The agency insured more than 5.5 million single-family homes through mid-December. But more than 500,000 were delinquent and headed for foreclosure.

“Striking the right balance between managing the FHA’s risk, continuing to provide access to undeserved communities, and supporting the nation’s economic recovery is critically important,” FHA Commissioner David Stevens said in a news release . “When combined with the risk management measures announced in September of last year, these changes are among the most significant steps to address risk in the agency’s history.”

The new guidelines will force consumers to spend more money upfront, shifting some of the risk away from the FHA. Here’s a look at the major changes:

Mortgage Insurance Premiums Are Going Up
The upfront premium cost of an FHA loan will jump to 2.25 percent from 1.75 percent. This increase will go into effect in the spring.

Credit Score and Down Payment Shifts
The FHA’s signature 3.5 percent down payment will remain in place — as long as the borrower has a FICO score of at least 580. Those with scores below the threshold will have to put down at least 10 percent. That’s still better than conventional loans, which typically require a down payment of at least 15 percent. This is set to take effect in early summer.

Concessions Get Trimmed
FHA buyers won’t be able to get as much closing cost relief come this summer. Currently, sellers can pay closing costs and concessions up to 6 percent. The new FHA guidelines will roll that back to just 3 percent. Officials hope the move helps curb appraisal inflation.

Greater Oversight of FHA Lenders
The FHA will also introduce new layers of accountability for its lenders. Starting February 1, the agency will begin publishing lender performance rankings on the Housing and Urban Development website.

Along with these new changes, FHA officials say they’re keeping a close eye on underwriting standards and methods to keep underwater and overburdened homeowners afloat.

Recently, FHA has decided that they want to have more oversight and regulatory authority for FHA approved lenders. Yesterday, they released a statement declaring that HUD will be focusing more on regulatory authority when it comes to FHA lenders – in addition to some of the current HUD investigations that are currently being held.

According to the press release, here are some of the regulatory oversight changes coming soon to the FHA approved lender program:

• Publicly report lender performance rankings to complement currently available Neighborhood Watch data – Will be available on the HUD website on February 1.
  • This is an operational change to make information more user-friendly and hold lenders more accountable; it does not require new regulatory action as Neighborhood Watch data is currently publicly available.
• Enhance monitoring of lender performance and compliance with FHA guidelines and standards.
  • Implement Credit Watch termination through lender underwriting ID in addition to originating ID.
  • This change is included in a Mortgagee Letter to be released tomorrow, January 21st, and is effective immediately.
• Implement statutory authority through regulation of section 256 of the National Housing Act to enforce indemnification provisions for lenders using delegated insuring process
  • Specifications of this change will be posted in March, and after a notice and comment period, would go into effect in early summer.
• HUD is pursuing legislative authority to increase enforcement on FHA lenders. Specific authority includes:
  • Amendment of section 256 of the National Housing Act to apply indemnification provisions to all Direct Endorsement lenders. This would require all approved mortgagees to assume liability for all of the loans that they originate and underwrite
  • Legislative authority permitting HUD maximum flexibility to establish separate “areas” for purposes of review and termination under the Credit Watch initiative. This would provide authority to withdraw originating and underwriting approval for a lender nationwide on the basis of the performance of its regional branches

In addition to raising the net worth requirement for lenders and potentially changing the way that loan officers are allowed to be compensated – it appears as if the entire landscape of the origination business is changing and with the vast amount of changes happening, one thing is clear – no one is sure what unintended consequences there will be.