FHA is building record reserves against an approaching storm

The Federal Housing Administration has pumped record levels of cash into its mortgage insurance fund and could weather a housing crisis without a taxpayer bailout, the agency said in its Dec. 31 report. annual report to Congress.

But as delinquencies on FHA loans rise and more homebuyers make budget-busting monthly mortgage payments, the Trump administration is eyeing stricter underwriting requirements for borrowers with multiple risk factors.

The FHA has also streamlined the process for initiating foreclosure proceedings against homeowners who are repeatedly delinquent on their payments.

The FHA Mutual Mortgage Insurance (MMI) fund, which protects mortgage lenders when borrowers default, grew 9 percent to $189 billion in the fiscal year ended Sept. 30, HUD reported.

But FHA’s “continued support of American homebuyers requires strong oversight of the MMI Fund to protect taxpayers from unnecessary risks,” Housing Secretary Scott Turner said in a foreword to the Dec. 31 report.

The capital ratio of insurance funds reaches a record high

The MMI fund’s capital ratio fell below the statutory minimum of 2 percent from 2009 through 2014 due to the subprime housing crisis, requiring a $1.69 billion taxpayer bailout.

FHA premium increases and improving housing market conditions have since helped replenish the fund, which has maintained a record-high capital ratio of 11.45 percent for two years in a row – more than five times the regulatory minimum.

The Mortgage Bankers Association argues that the FHA’s “robust capital reserves” could justify providing some relief to homebuyers by lowering FHA premiums, as the Biden administration did in 2023.

“Such changes must be responsibly calibrated and informed by careful evaluation of the program and the economic drivers behind the rising number of serious offenders to ensure the program remains safe, healthy and sustainable,” MBA President Bob Broeksmit said in a statement statement.

The FHA’s stress tests show that if a downturn on the scale of the Great Recession occurs again, the insurance fund’s capital ratio would fall to 4.42 percent – ​​still more than twice the minimum set by Congress.

But private mortgage insurers that compete with the FHA say that if the agency’s insurance fund were required to meet the same standards to which they are subject, it would be considered undercapitalized by $32 billion.

“FHA must remain well capitalized to fulfill its critical countercyclical function in the U.S. housing market and enable access to mortgage credit for those who might otherwise be unable to obtain financing through the conventional and portfolio mortgage markets backed by private capital,” said US Mortgage Insurers, an association representing private mortgage insurers. statement.

Private mortgage insurers compete with FHA and VA loan programs to serve homebuyers who cannot make a large down payment. Fannie Mae and Freddie Mac require private mortgage insurance when homebuyers put down less than 20 percent.

FHA premium reductions in 2015 and 2023 have made FHA loans more attractive than conforming mortgages with private mortgage insurance, for many borrowers with a loss of less than 5 percent, according to a analysis from the Urban Institute.

But borrowers with a FICO score of 700 or higher can often get a better deal by getting a conforming loan backed by Fannie or Freddie with private mortgage insurance, the analysis found.

In the fiscal year ended September 30, the FHA backed 876,502 mortgages totaling $275 billion, bringing the total number of mortgages insured to more than 8.1 million with $1.6 trillion in unpaid principal.

A 3.26 percent increase in FHA loan limits by 2026 will allow FHA-approved lenders to finance the purchase of single-family homes for up to $541,287 in low-cost markets and up to $1.249 million in high-cost markets such as New York, San Francisco and Washington, D.C.

But delinquencies on FHA loans are increasing, with borrowers five times more likely to fall behind on their payments than those who rely on conventional loans backed by Fannie Mae and Freddie Mac (the government-sponsored entities, or “GSEs”).

FHA delinquencies are increasing

Mortgage arrears by loan type. Source: ICE Mortgage MonitorDecember 2025.

Nearly 12 percent of FHA borrowers were delinquent in October, compared with the average of 3.34 percent for all mortgage holders and less than 2 percent for loans backed by Fannie and Freddie, according to data tracked by ICE mortgage technology.

Because they start out with less equity in their homes, ICE data shows that FHA buyers are also more likely to end up underwater or declare bankruptcy when home prices fall.

Tightened eligibility for loan mods

To reduce its exposure to future claims, the FHA announced in April that it was tightening eligibility requirements for these claims programs that are designed to help struggling borrowers.

The new ruleswhich went into effect Oct. 1, require severely delinquent borrowers to successfully complete a trial payment plan before receiving more generous “permanent” solutions, such as a loan modification.

Borrowers who received a “permanent home retention option” within the past two years will no longer be eligible for a new option, up from the previous 18-month limit.

In its annual report, the FHA said it wants to avoid “the cycle of recurring defaults and interventions” that increase losses.

“While early COVID-19 loss mitigation interventions were relatively successful, FHA is currently approaching a 60 percent renewal rate, which is unsustainable and a detriment to the MMI fund,” the agency reported.

Before the pandemic, only 2 percent of FHA borrowers had received two or more home preservation options in the past five years. By September 2025, that figure had risen to 40 percent.

Going forward, borrowers who default within 24 months of receiving a home preservation option “will now be ineligible for additional home preservation options and will be more likely to proceed with loss mitigation, disposition or foreclosure if necessary,” the report said. “These loans are expected to terminate sooner. As a result, FHA predicts a near-term increase in delinquencies and claims.”

In the long term, however, FHA expects it will save $1 billion by resolving “serious cases of re-default.”

We should be wary of ‘risk-layered lending’

In addition to “restoring common sense loss mitigation safeguards,” the FHA says it is “working to address an emerging trend in risk-tiered lending” to borrowers with multiple risk factors – low credit scores and high loan-to-value (LTV) and debt-to-income (DTI) ratios.

Such “risk-tiered loans” face delinquencies that are nearly three times higher than other loans, and a loss rate that is 2.5 times higher, the agency found.

Average credit scores on FHA loans have been rising over the past four years, reaching a ten-year high of 679 last year. The loan-to-value ratio for purchase loans has averaged between 95 and 96 percent for more than a decade.

But thanks to rising home prices and mortgage rates, the debt-to-income ratio of FHA borrowers has risen from less than 40 percent during the 2005-2006 housing bubble to more than 45 percent in the past three years.

Rising debt-to-income ratios of borrowers

The FHA says the percentage of loans with all three risk layers is now more than three times what it was 12 years ago, from 2.6 percent in 2013 to 8.4 percent in 2025.

Loans with all three risk layers “incur higher costs for the MMI fund and therefore warrant additional investigation and monitoring,” the report said.

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