Defaults on refinanced loans insured by the FHA shot up to 4.38% from 3%, while defaults on purchase-assist loans dropped to 4.01% from 4.57% during the last two years.

The FHA insurance fund which covers losses on FHA-insured loans has shrunk to $12.9 billion as of September 30, 2008 from $21.2 billion a year earlier, a 39% drop.