FHA Loss Rate Climbing Fast.(Federal Housing Administration )

In their zeal to increase the U.S. homeownership rate, the Bush and Clinton administrations liberalized FHA underwriting guidelines - but now the chickens are coming home to roost.

According to a new independent audit conducted by KPMG LLP, claims paid by the Federal Housing Administration soared by 42% last year to $7.8 billion.

The audit pins some of the blame on the loosening of underwriting standards: "We recognize that economic factors such as home purchase price appreciation and increased unemployment rates have an impact on the default rate. However, changes in underwriting policies may also contribute to the higher default rates."

KPMG notes that since 1995 there have been "numerous changes" to FHA's underwriting policies and procedures, which were designed to increase homeownership opportunities. (The U.S. homeownership rate is at an all-time high.)

The audit found that FHA loans originated in recent years experienced higher default rates than loans made in years prior.

Contractors outside of the Department of Housing and Urban Development perform "post-endorsement technical reviews" (PETR) on new FHA endorsements for quality assurance purposes.

But the KPMG audit questions whether the PETR reviews serve any real purpose. "We performed an analysis of the 2,000 lenders with the highest volume of originations and found no strong correlation between the percentage of PETR poor ratings received by a lender and ...