Explore the FHA Home Loan Debacle and its impact on the housing market as the Trump Administration ends mortgage assistance.

The Trump Administration has decisively terminated the FHA Covid-19 mortgage assistance program, a move that many experts assert is long overdue. Originally launched to aid millions of American homeowners in retaining their properties, this program has clearly contributed to artificial inflation in home prices and poses a significant risk of triggering a second housing bubble. Announced on Tuesday, this decision has been welcomed as a necessary corrective measure.

A February editorial in the Wall Street Journal confidently declared, “COVID-era mortgage relief, initiated by Trump in 2020 and extended by Biden in 2021, has created another subprime housing bubble and put taxpayers at risk. Trump should end it.” The editorial emphasized that, under the guise of Covid relief, the Biden administration has obscured mounting problems in the housing market by making payments to borrowers and mortgage servicers to prevent foreclosures. Alarmingly, out of the 52,531 FHA loans that became seriously delinquent within their first year last year, only nine resulted in foreclosure. These measures have artificially prevented thousands, if not millions, of foreclosures, which would have added necessary selling pressure to a housing market that is overdue for a correction. It is evident that some homeowners may have taken advantage of this program by deliberately neglecting their mortgage payments to gain relief. The editorial presented a stark scenario: “Consider a borrower who misses five $4,000 monthly mortgage payments. The servicer adds the $20,000 in missed payments to the mortgage and reduces monthly payments by $1,000 for three years—resulting in an additional $36,000 added to their mortgage. Consequently, the borrower is $56,000 deeper in debt, yet without incurring any additional interest.” Mortgage expert John Comiskey projects that the FHA made an astounding $2.6 billion in mortgage payments from these standalone partial claims last year. Analysis of records reveals that some borrowers have made no payments for several years, while the FHA has repeatedly stepped in to bring their loans current every three to four months. Comiskey has labeled this initiative “an abject FHA loss mitigation policy failure.” He recently tweeted that approximately 70% of the 160,000 FHA Covid relief modifications made in the past two years are now delinquent, with about 55% categorized as seriously delinquent. Mark Zandi, chief economist for Moody’s Analytics, has pointed out that the FHA delinquency rate is a critical “Leading Indicator #2” for recession risk, falling just behind consumer confidence in its significance, and he describes it as “a proverbial canary in the coal mine.” As of September 2024, the FHA holds active mortgage insurance on 7.81 million single-family mortgage loans. In September 2024, the share of FHA borrowers who were seriously delinquent reached 4.15%, a slight increase from the previous year but consistent with pre-pandemic rates.

Of the approximately 425,000 loss mitigation actions reported by the FHA to Congress in its 2024 annual report, just under 324,000 were partial claims. Furthermore, loan servicers are incentivized to participate in the relief program, receiving between $500 and $1,750 every time the FHA intervenes on behalf of borrowers. This system demands scrutiny and reevaluation moving forward.