FHA Safety Net Shrinks, Setting Up Foreclosure Bump

A key pandemic-era lifeline for struggling homeowners is being dialed back, and a rise in foreclosures could ripple through parts of the housing market.

Foreclosure filings jumped 28 percent year-over-year in March, according to Attom data, a signal that distress is beginning to surface as federal relief programs tighten. Changes to a Federal Housing Administration program — long used to help delinquent borrowers stay put — are limiting access and pushing more homeowners toward forced sales, the Wall Street Journal reported.

At issue is the FHA’s “partial claim” program, which allowed borrowers to tack missed payments onto their loan balance as an interest-free junior lien.

During the pandemic, federal officials loosened the rules, letting homeowners repeatedly tap the subsidy as long as claims didn’t exceed 30 percent of the mortgage. That flexibility kept many afloat, but also invited abuse and prolonged distress rather than resolving it.

Restrictions that took effect in October are far stricter. Borrowers can now access relief only once every two years and must first make three consecutive on-time payments, a hurdle many already-strained households may not clear. Those who can’t are increasingly showing up in foreclosure pipelines.

The exposure is concentrated but meaningful. FHA loans account for roughly 10 percent of outstanding U.S. mortgages, skewing toward first-time and lower-income buyers. As of March, about 11.6 percent of those borrowers were delinquent, according to a tracker of outstanding FHA loans.

Analysts estimate that up to half of seriously delinquent FHA borrowers won’t meet the new payment requirements, potentially translating to roughly 250,000 distressed sales over the next 12 to 18 months.

Whether that wave dents home prices will depend heavily on geography. In stronger markets, rising values have given some owners enough equity to sell and cover their debts. In weaker pockets, distressed sales are already resetting comps.

One Florida home purchased for nearly $400,000 in 2022 recently listed for $270,000, the kind of discount that can drag down neighborhood pricing.

— Holden Walter-Warner