Why This Matters

There has been considerable discussion in the popular press about the increasing number of delinquencies on Federal Housing Administration (FHA) loans. In this brief, we look at the often-cited reasons for this increase and show that none of them can explain the rise. We also point out that the increase, while sizeable, is not a cause for concern.

What We Found

We find a great deal of the increase is attributable to loans from the 2022 and 2023 vintages that are going seriously delinquent in the first year following origination. We identify several commonly mentioned reasons for this:

• relaxed origination standards, particularly the debt-to-income ratio
• competition from the government-sponsored enterprises pushing a greater number of riskier loans toward the FHA space
• lack of home price appreciation
• loss mitigation improvements encouraging borrowers not to pay their mortgage
• credit scores not being as indicative of creditworthiness as they were before the pandemic

We empirically analyze each of these causes and show that none of these factors can make a significant contribution in explaining the rise in early-stage delinquencies of some of the more recent vintages.

Further, though the delinquency increase might seem large on a percentage basis, the actual delinquency rate simply brings us back to 2017 and 2018 FHA delinquency levels, not nearly a large enough increase to affect the health of the Mutual Mortgage Insurance Fund. Moreover, improvements in the loss mitigation waterfall will substantially offset financial losses from the increased delinquencies.