The Blubber

Borrowers with government-backed home loans are falling behind on payments at an increasing rate, signaling potential financial strain for lower-income Americans in today’s economy.

Delinquency rates for Federal Housing Administration (FHA) and Veterans Affairs (VA) loans climbed to 11.03% and 4.7%, respectively, by the end of last year, surpassing pre-pandemic levels, according to the Mortgage Bankers Association.

While FHA and VA loans don’t have income restrictions, they are government-insured and come with lower down payment and credit score requirements than conventional mortgages, making them a common choice for borrowers with lower incomes or less-than-perfect credit.

Rising Delinquencies Amid Economic Pressures

Conventional mortgage delinquencies are also ticking up, but at a slower pace. At 2.62%, they remain below pre-pandemic levels and near historical lows. The gap between conventional and government-backed loan delinquency rates underscores the financial pressures lower-income borrowers face—including persistently high home prices, inflation, and rising borrowing costs.

“While the Fed is cutting rates, which has helped boost asset prices somewhat, lower-income households are not feeling the benefit,” said James Knightley, chief international economist at ING. “Their borrowing costs aren’t decreasing, and inflation is still eating into their spending power.”

Recent Consumer Price Index data showed prices rising 3% year-over-year, still above the Federal Reserve’s 2% inflation target. The Fed cut interest rates three times in late 2024 amid signs of slowing inflation and a weakening job market, but has since paused as inflation proves stubborn. Traders now anticipate just one rate cut in 2025.

Are Delinquencies Set to Climb Further?

The reasons behind mortgage delinquencies vary. Among FHA borrowers who were seriously delinquent—more than three months behind on payments—roughly 25% cited loss of income, while 19% blamed excessive debt.

Private mortgage lending to subprime borrowers largely vanished after the 2008 financial crisis, leaving FHA loans as the closest alternative. Even in strong economic conditions, delinquency rates for FHA loans tend to be several times higher than those for conventional mortgages.