Are government policies masking how bad things really are?

Nearly 2 out of 3 people are borrowing more than they can likely handle.

Today, I want to talk about something important in the housing world: FHA loans. These are the loans that help lots of people—especially first-time buyers—get into homes with smaller down payments. But lately, more people with FHA loans are struggling to pay them back. Let’s break it down together, look at the past 20 years, and see why this could get worse if jobs or the economy take a hit. I’ll keep it simple and use some numbers to show what’s going on.

FHA Default Rates Are Going Up

First, let’s talk about “default rates.” That’s just a fancy way of saying how many people aren’t making their mortgage payments on time. Right now, FHA loans are seeing more defaults than usual. In the last quarter of 2024, the Mortgage Bankers Association (MBA) said that 10.83% of FHA loans were late by at least 30 days. That’s a big jump from 9.52% a year earlier in 2023. And if we look deeper, the “seriously delinquent” rate—people who are 90 days or more behind—went up to 3.7% in late 2024, compared to 3% a year before.

Now, let’s zoom out. Over the past 20 years, FHA default rates have gone up and down. Back in 2007, during the big housing crash, the serious delinquency rate for FHA loans hit around 7%. It got even worse by 2010, climbing to over 8%. Then things got better—by 2019, before the pandemic, it was down to about 3.5%. But here’s the thing: today’s 3.7% for serious delinquencies is creeping back up, even though the job market is still pretty strong with unemployment at 4.1% in late 2024. That’s a warning sign.

More People Owe Too Much Compared to What They Earn

One big reason defaults are rising is that more FHA borrowers owe way more than they used to compared to their income. This is called the “debt-to-income ratio,” or DTI. It’s just how much of your monthly money goes to bills versus what you bring home. The FHA says 43% is the usual limit—meaning no more than 43 cents of every dollar you earn should go to debt. But tons of people are way past that now.

Check this out: In 2007, before the housing crash, 35% of new FHA borrowers had a DTI over 43%. By 2020, that number jumped to 54%. And in 2024? A whopping 64% of FHA borrowers were above 43%. That’s almost two out of every three people borrowing more than they might handle! Back in 2004, only about 40% were over that line. So, over 20 years, we’ve gone from less than half to way more than half stretching their budgets super thin.

A Strong Job Market Isn’t Saving Everyone

Here’s what’s weird: the job market is still okay. Unemployment is low at 4.1%, and people are working. Normally, when jobs are good, fewer people miss mortgage payments. But FHA defaults are climbing anyway. Why? Well, those high DTIs mean borrowers don’t have much wiggle room. If rent, groceries, or car payments go up (and they have, thanks to inflation), folks can’t keep up—even with jobs.

Now, imagine if the job market doesn’t stay strong. Let’s say unemployment jumps to 5.5% or higher, like some experts predicted could happen if the economy slows down. Back in 2022, housing expert Ed Pinto said that if unemployment goes above 5.5%, FHA borrowers would feel it hard. With so many people already stretched, defaults could shoot up—not just for FHA loans, but for other types too.

What If the Economy or Government Spending Slows Down?

Another thing to think about is the economy and government spending. Right now, the government is spending a lot, which keeps jobs flowing. But if that spending gets cut—like if there’s less money for government jobs or programs—unemployment could rise. During the Great Recession (2007-2009), unemployment hit 10%, and FHA defaults soared. If we see cuts now, or if the economy weakens, those 64% of FHA borrowers with high DTIs might not make it. Defaults could climb way past today’s 10.83%—maybe even back to those scary 8% levels from 2010.

Government Policies Are Hiding the Problem

Here’s something tricky: the government has rules that make FHA defaults look better than they really are. When someone falls behind on an FHA loan, the companies that manage these loans (called servicers) can step in. The government pays them to either cover the missed payments or change the loan—like lowering the monthly amount—so the borrower doesn’t lose their home. This is called “payment modification” or “forbearance.”

During COVID, almost 8.4 million borrowers got help like this, according to the MBA. And it’s still happening. In 2024, programs like the COVID-19 Recovery Modification let servicers use government money to catch up late payments for people 90 days behind. Sounds nice, right? But here’s the catch: it masks how bad things really are. If servicers weren’t paid to fix these loans, we’d see way more defaults reported. Some experts, like Larry Goldstone from BSI Financial, say half of these “fixed” loans end up late again anyway—meaning the problem’s just being kicked down the road.