Federal Housing Administration-insured loans are starting to be a problem area for mortgage lenders, and that might be making its way into the broader economy, ICE Mortgage Technology said.
Its First Look report for February noted that for the ninth consecutive month, the share of loans of all types late on their payments increased by 19 basis points to 3.53%. That is an increase of 5 basis points from January. But the rate is still lower than where it was prior to the pandemic.
By the end of the month, 1.91 million properties had mortgages past due by 30 days or more but had not yet entered foreclosure.
That is 28,000 higher than for January and a 131,000 gain
The rise in FHA delinquencies is unsurprising, given that the program primarily serves borrowers with lower credit scores and smaller down payments, said Andy Walden, head of mortgage and housing market research at Intercontinental Exchange.
"Then when you look at what's been happening in recent years with the rise in interest rates and the pressure that's putting on, from an affordability standpoint, you've seen [debt-to-income ratios] considerably rise among those FHA originations as well," he explained.
"Couple both of those things together, along with some of the pressures at the low end of the credit and income spectrum and the broader economy and you start to see delinquency rates rise on those FHA loans."
FHA borrowers, on average, have a 70-point lower credit score than the market at large.
Delinquency rates on these loans have been rising for the past two years and are now surpassing the previously declining rates of conforming and portfolio mortgages, Walden added.
Add in rising unemployment rates, to approximately 4.1% from a bottom of 3.4%, showing a shift in the broader U.S. economy that is also contributing to the rise in delinquencies, he said.
Mortgage performance remains strong historically, but recent trends indicate a shift.
"We've always known that FHA was going to be the early mover," said Walden. "We're starting to see that early mover move and starting to catch some eyes." But, the performance of these loans is still much stronger than it was during the Great Financial Crisis.
It is starting to catch the industry's attention.
"It's a broad upward trend in a still strongly performing market," Walden said. "From a performance standpoint, the question is, where does it go from here, and if we do start to see more pressure on the broader economy?"
While rising values have mitigated problems for distressed homeowners, many recent vintage loans, originations, starting in 2022, have those higher DTIs, meaning a distressed borrower has less cushion.
The Mutual Mortgage Insurance Fund should be able to handle a rise in foreclosures of FHA loans as its capital ratio as of the end of the federal fiscal year was
An additional 211,000 properties are in the foreclosure pre-sale inventory, an increase of 4,000 from one month earlier, but 1,000 fewer compared with the prior year.
Foreclosure starts increased almost 35% compared with the same month in 2024, which ICE attributed to an increase in Veterans Affairs-guaranteed mortgage activity following
But foreclosure starts were 17% lower compared with January.
The VA delinquency rate did rise by 19 basis points, or close to 5%, year-over-year, Walden pointed out. But that was still much better than the 112 basis point gain in FHA late payments.
Prepayment speeds dropped, a consequence of the higher mortgage rates during the month and a seasonal dip in home sales, ICE said. The 46 basis point rate, the lowest in a year, was 5.1% less than January but 8.7% higher versus February 2024.
