by Wolf Richter, Wolf Street:

Atlanta metro: 53,000 FHA mortgages are delinquent. Houston metro, 47,000. Just FHA, not including other delinquent mortgages. And when forbearance ends? By metro.

Even as the housing market is being whipped into a mad land rush, with new single-family house sales spiking 46% year-over-year, highest since 2007, with existing home sales jumping to the highest since 2006, and with prices in many metros soaring to new records, the other end of the housing market – high-risk government-insured mortgages – is falling apart, and delinquencies rose to another all-time historic high.

The Federal Housing Administration (FHA) which insures about 8 million high-risk mortgages with lower requirements – “low down payments,” “low closing costs,” and “easy credit qualifying,” it says – reported that an all-time record of 17.4% of its mortgages were delinquent in August, up from what had been the all-time record in July of 17.0%, and having doubled from a year ago.

The FHA’s mortgage portfolio always has higher delinquency rates than more risk averse portfolios. Over the past two years, about two-thirds of mortgages had credit scores at origination of 679 or below. To tamp down on the risks, the FHA began tightening up its lending standards in 2019. But it wasn’t prepared for what came next.

“Seriously delinquent” mortgages in the FHA portfolio – meaning, 90 days or more delinquent – rose to an all-time record of 11.2% in August, from 10.9% in June, having nearly tripled from 3.8% August 2019.

This data, released by the FHA’s Early Warning System, differs slightly from the data the FHA releases later in its official monthly report.

The delinquency rate for the top 169 metros (table at the bottom), which account for about 6 million of FHA-insured mortgages, rose to 18.0%, and seriously delinquent mortgages rose to 11.7%.

In 29 of these metros, the delinquency rates are between 20% and 27.7%! Other metros have much lower delinquency rates. Because of these huge differences by metro, we’ll look at them by metro.

The delinquency rates include mortgages that were delinquent and were subsequently moved into forbearance programs, where the lender agrees to not pursue its legal rights due to nonpayment of the mortgage, and where the borrower doesn’t have to make payments for a set period. A form of “extend and pretend.”

During the term of forbearance – six months, under the CARES Act, extendable by another six months – while the borrower doesn’t have to make payments, the unpaid interest is added to the mortgage principal balance, and eventually interest and principal payments will need to be made.

The FHA specializes in low-down-payment higher risk mortgages, including “subprime” mortgages (FICO credit score below 620). And down-payment requirements are minimal for subprime mortgages:

• Credit score of 580 or higher: down payments as low as 3.5%.


• Credit score below 580: down payment of 10%.

Many of these borrowers are precisely the ones who got hit hardest by the unemployment crisis.

These delinquencies are not happening because home prices have plunged and people could, but refuse to, make mortgage payments because they’re underwater, the sort of strategic default that happened massively during the Mortgage Crisis, often with investment properties. Home prices have risen, and most of these borrowers are not underwater. The delinquencies are occurring because people lost their jobs or their contract work and cannot make the payments for economic reasons.

In some of the Metropolitan Statistical Areas (MSAs), the FHA insures a relatively small share of mortgages, and a high delinquency rate among FHA mortgages in those metros has less impact on the market. But in other MSAs, the FHA insures a large share of mortgages, and a high delinquency rate in those MSAs puts the housing market at serious risk.

At some point, forbearance will end, and borrowers will have to make payments again, or sell the house and pay off the mortgage, or find themselves in a foreclosure.

The highest delinquency rates among FHA-insured mortgages occur in Nassau County-Suffolk County, NY (27.7%); and New York-New Jersey City-White Plains, NY-NJ (27.0%); in both MSAs, over 20% of the FHA mortgages are “seriously delinquent.”

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