According to a recent report, U.S. homeowners are facing difficulties in meeting their mortgage payments for government-backed loans. Although the default rates are still relatively low, data from Intercontinental Exchange (ICE) reveals that delinquencies on Federal Housing Administration (FHA) loans reached a nine-year high in November, excluding the pandemic period. Additionally, early-stage delinquencies on Veterans Affairs (VA) loans have also escalated to their highest level since 2009.

In November, the national delinquency rate rose to 3.39%, a significant increase of 3.95% compared to the previous month. Currently, there are approximately 1.8 million properties that are 30 or more days past due, without being in foreclosure, as reported by ICE. However, it is important to note that this rate is still 64 basis points lower than the levels experienced prior to the pandemic.

While this data may be concerning, experts at ICE have emphasized that it does not indicate an impending market crash. They highlight the significance of monitoring FHA delinquencies, considering that both the FHA and VA markets are expected to serve as an indicator for mortgage performance among low-credit-score borrowers since the Great Financial Crisis. Andy Walden, Vice President of Enterprise Research at ICE, explains that although the rise in delinquencies is worth observing, there is no significant cause for concern at present due to historically low overall delinquency rates.

It is essential to reflect on the lessons learned from the Great Recession, which was largely attributed to the excessive subprime mortgage lending observed during the early 2000s. This ultimately led to the collapse of the market in 2007.

The Impact of Subprime Borrowers on Mortgage Loans

Subprime borrowers, characterized by their poor credit history or below-average credit scores (typically below 620), pose a significant risk to lenders. In fact, during the years leading up to the Great Recession, many borrowers who obtained subprime mortgage loans struggled to make their payments and ended up defaulting just months after obtaining their loans (St. Louis Fed).

In the aftermath of the economic downturn, access to mortgage loans for individuals with low credit scores became more restricted. These borrowers were often limited to government-backed loan products such as FHA and VA loans, as well as loans offered by various government agencies and government-sponsored enterprises.

Recent data from ICE revealed that as of October 2023, approximately 60% of all mortgages originated in the U.S. for borrowers with credit scores below 660 were FHA loans. Additionally, VA loans accounted for around 14% of these loans (ICE data).

It is worth noting that, although lending to individuals with low credit scores is significantly lower (80% less) than the pre-financial crisis levels, FHA and VA loans remain essential avenues for these borrowers to achieve homeownership. In fact, over the past nine years, these government-backed loan products have accounted for approximately 70% of all lending to borrowers with credit scores below 660 (Walden).

This starkly contrasts with the period between 2004 and 2006 when FHA and VA loans played a minimal role in lending to this specific group of borrowers (<10%) (Walden).

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