Subprime Mortgages Fall Massively Delinquent. Taxpayers on Hook. Housing Market Splits in Two, by Wolf Richter

It’s not as big as the last subprime mortgage crisis, but it’s getting there. From Wolf Richter at

On one side: land rush by a few hundred thousand home buyers. On the other: millions of homeowners with delinquent mortgages. Here are the metros by FHA delinquency rate. Two exceed 27%.

The Federal Housing Administration (FHA) prides itself in insuring subprime mortgages with, as it says, “low down payments,” “low closing costs,” and “easy credit qualifying” – all true. Of its active portfolio of 8 million mortgages that it insures, 17% were delinquent in July, the highest rate in FHA history. In many metros, the delinquency rates of FHA mortgages are above 20%; and in two metros, the delinquency rates exceed 27%.

The delinquency rates include mortgages that were delinquent and then entered a forbearance agreement with the lender, where the lender agreed to not pursue its rights due to nonpayment of the mortgage. During the term of forbearance – six months, under the CARES Act, extendable by another six months – the borrower isn’t making payments, but the missed interest and principal payments are added to the mortgage balance and will need to be paid somehow.

A FICO credit score below 620 is considered “subprime.” The FHA insures mortgages of borrowers with credit scores well below that.

  • If the borrower has a credit score of at least 580, the FHA will accept down payments of only 3.5%.
  • If the FICO score is below 580, no problem, but then down payment is 10%.

Many of the people whose mortgages the FHA insures have lost their jobs or had had their hours or work reduced.

In terms of the lenders, the good thing is that they don’t carry the risk. The FHA and thereby the taxpayer carry the risk.

In terms of the taxpayer, the good thing is that home prices have risen in many markets in recent years, and are rising there right now, and that many fallen-behind homeowners can sell their home and pay off the defaulted mortgage with the proceeds from the sale, and maybe have a little cash left over. And if the home goes into foreclosure because the proceeds wouldn’t have been enough to pay off the mortgage, the losses would be relatively small.

The widespread home price declines that occurred during the subprime crisis of Housing Bust have not happened yet. And that’s why at the moment no one is panicking about these sky-high delinquency rates.

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