Borrowers who got home loans through government-backed programs are increasingly falling behind on their payments, a potentially worrying signal for how lower-income Americans are faring in today’s economy.
Delinquency rates on Federal Housing Administration and Veterans Affairs loans reached 11.03% and 4.7%, respectively, at the end of last year, according to the Mortgage Bankers Association, breaching pre-pandemic levels.
While FHA and VA loans don’t have income restrictions, they’re insured by the government and have looser down payment and credit score requirements than conventional mortgages, making them popular among borrowers with dinged credit or lower incomes.
Conventional mortgage delinquencies are creeping up too, but much more slowly. At 2.62%, they remain below pre-pandemic levels and near historical lows. The divergence in that data likely reflects the extra economic pressures lower-income borrowers have faced in recent years, in particular high home prices, inflation, and the rapidly rising interest rates designed to address it.
“While the Fed is cutting rates, and that’s helped lift asset prices a little bit, those on the lower-income household side are not feeling any benefit,” said James Knightley, chief international economist at ING. “Their borrowing costs are not going down. If anything, they’ve been going up, and we still have sticky inflation that’s eating into spending power.”
January Consumer Price Index data showed prices up 3% from a year earlier, well above the Federal Reserve’s 2% goal. The Fed cut interest rates three times in late 2024 amid signs that inflation was easing and the job market was weakening, but is now on pause as inflation shows signs of persistence. Traders are now expecting a single rate cut this year.
Gradual rise in delinquencies on the way?
The reasons consumers fall behind on their mortgages vary. About a quarter of FHA borrowers who were seriously delinquent — meaning they were more than three months behind on their payments — cited loss of income, followed by 19% who blamed excessive debt.
Private mortgage lending to subprime borrowers all but dried up after the financial crisis, and FHA loans provide the closest proxy today. Even in the best economic times, delinquency rates on these loans are typically several times higher than on conventional loans.
“It is a very different borrower profile,” said Andy Walden, vice president of enterprise research strategy at ICE Mortgage Technology. “It was kind of expected that this would happen in this FHA section first because those are the borrowers that are typically impacted first when the broader economy changes. I think you’ll see a gradual rise in delinquencies outside of that.”
Higher-income consumers have fared well in recent years because they’re more likely to have invested in the stock market and benefited from several strong years of gains, plus they spend a smaller portion of their incomes on essentials like groceries.
But what starts as a stressor for less well-off borrowers can often spread, particularly if the job market weakens generally. In a recent report, ICE said FHA and VA loan delinquencies “are likely to serve as canaries in the coal mine” for broader mortgage payment trends during this economic cycle.
Rikard Bandebo, chief economist for VantageScore, has been eyeing growing delinquencies among the high-income group his credit-scoring company tracks. Those earners, who make over $150,000 a year, are now falling behind on their mortgages, car loans, and credit cards at a relatively faster rate than households bringing in less than $45,000 annually.
“The costs of inflation are really beginning to hit them now,” Bandebo said, adding that while this group might not have felt the sting of higher grocery costs, they’re still getting squeezed by ballooning expenses on things like car payments, insurance, and school tuition.
Even as more consumers feel squeezed, today’s delinquencies among all types of borrowers remain far below levels seen during the 2008 financial crisis and the pandemic lockdowns of 2020.
“We’re coming up off of a really low level,” said Molly Boesel, senior principal economist at data provider CoreLogic.
And homeowners are generally in a far better financial position than they were during the 2008 housing crisis — stricter mortgage underwriting and strong home price appreciation in recent years mean very few borrowers are underwater on their purchases.
Still, Boesel said she’s monitoring where in the country borrowers are paying late. CoreLogic found that delinquencies are rising in 80% of metro areas, suggesting a more widespread problem that can’t be explained by single destabilizing events like natural disasters.
Right now, exactly when a borrower got their loan also matters. Those who purchased in 2021 or earlier, when mortgage rates were near all-time lows and home prices hadn’t yet hockey-sticked higher, have much lower debt-to-income ratios and healthier equity positions than those who bought in 2022 or 2023, said Walden, of ICE.
Given how much harder it’s become to afford a home, recent borrowers are going delinquent early in their loans at higher rates than those who bought a few years earlier, even though underwriting standards haven’t changed. Higher prices and mortgage rates also mean they build equity at a slower pace.
“It’s a night-and-day difference,” Walden said. “Lenders aren’t stretching to make risky mortgages, but it’s a very different dynamic in terms of equity.”
Claire Boston is a Senior Reporter for Yahoo Finance covering housing, mortgages, and home insurance.
