Urban Institute says rise in FHA mortgage delinquencies isn’t a cause for concern

A recent report from the Urban Institute analyzed potential reasons behind the increasing number of delinquencies on Federal Housing Administration (FHA) loans. While the increase is sizable, it’s not a cause for concern, the authors of the report suggest.

Laurie Goodman, Jun Zhu, Ted Tozer and Jung Hyun Choi — the authors of the July 10 report — found that the increase is attributable to loans from the 2022 and 2023 vintages that became seriously delinquent in the first year following origination.

In December 2024, 17% of delinquent FHA purchase loans were from 2023–2024 vintages, up from 10% in 2019 for 2018–2019 vintages, according to their analysis of ICE Mortgage Technology data. Serious delinquencies among these newer loans are well above historic norms.

The authors suggest that the uptick merely returns delinquency rates to 2017–2018 levels and does not pose a serious threat to the FHA’s Mutual Mortgage Insurance Fund, especially given recent improvements in loss-mitigation strategies.

Seriously delinquent FHA loans — those that are at least 90 days past due — are up from a low point of 3.7% in the second quarter of 2024 to 4.8% in February 2025. This puts the overall rate on track with that of 2017.

The authors also looked at other potential influences on the FHA delinquency uptick. Rising debt-to-income (DTI) ratios among mortgage borrowers — a commonly mentioned possible reason for the rise — is not to blame, they concluded.

As home prices climbed from 2019 to 2024 and interest rates began to rise in 2022, DTI ratios shifted upward. In 2017, nearly half of FHA loans had DTI ratios below 43%, but by 2024, that share had dropped to 37.8%. Meanwhile, the share of loans with DTI ratios of 50% or higher grew from 21% in 2017 to 31% in 2024.

The government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac have taken on a larger share of high-LTV loans, but they’re not the cause of rising delinquencies either. As high-LTV lending declined overall, the GSEs’ portion rose from 43.7% in 2019 to 49.9% in 2024 — peaking in 2021 and 2022 before the FHA reduced mortgage insurance premiums in 2023.

Some worry that the GSEs taking on more high-LTV loans means that FHA is being left with weaker borrowers. But data shows that loans to borrowers with credit scores of 720 or higher have increased for both the FHA and the GSEs.

The authors also evaluated FHA borrower characteristics as a potential reason. Using 2017 data as a baseline for FICO scores, LTV ratios and DTI ratios, they found that although lending patterns have shifted, these changes should have balanced out and doesn’t explain the delinquency spike.

Instead, actual delinquency rates were much higher than predicted for loans from 2019 and 2020 due to the COVID-19 pandemic. While rates fell in 2021, they rose again in 2022 and stayed elevated in 2023, despite the fading effects of the pandemic. Data for 2024 is incomplete, the report noted.

Credit-score inflation isn’t to blame either. Some experts believe credit scores became less predictive during and after the pandemic because stimulus payments temporarily improved consumers’ financial profiles.

The report cites a separate study showing that credit card delinquencies from 2020 to 2024 were higher than predicted based on pre-pandemic models. When the researchers held the 2019 credit-score distribution constant in their projections, the gap between expected and actual delinquencies narrowed, which supports the idea that inflated credit scores played a role.

But the Urban Institute authors conducted a similar simulation for FHA mortgages using 2017 data on LTV and DTI ratios. This showed minimal change, indicating that while credit scores shifted slightly, the impact wasn’t large enough to explain the rise in FHA delinquencies.

At the end of the report, the authors concluded that “the most likely explanation remaining is the most obvious: borrowers are simply more financially stressed. Inflation has risen faster than wages, and borrowers are less able to establish an adequate emergency savings account to absorb shocks. The stress is disproportionately greater on borrowers with low credit scores, as shown by the experience with auto loan delinquencies.”