What’s Driving Foreclosures Higher? Government-Backed Loans

Core Insights - Foreclosure activity is increasing, particularly among low and middle-income borrowers, indicating a growing disparity in the housing market [1][7][8] - Nearly 12% of FHA borrowers were delinquent on mortgage payments in September, significantly higher than the 3.5% rate for all mortgage holders [3][9] - The rise in FHA loan delinquencies suggests broader affordability issues and financial strain in the U.S. housing market [2][5] FHA Loan Delinquency Trends - FHA loans, which represent about 15% of active mortgages, accounted for nearly 50% of foreclosure starts in the most recent quarter [8] - Foreclosure starts increased by 23% in Q3 2025 compared to the same period in 2024, although this is still 18% below pre-pandemic levels from Q3 2019 [3][8] - The average credit score for FHA loans is 677, lower than the 769 average for traditional bank loans, indicating a higher risk profile among FHA borrowers [9] Economic Implications - The current economic conditions are described as a "K-shaped recovery," where higher-income earners are rebounding faster than lower-income earners [4][5] - Factors contributing to the stress on FHA homeowners include a softer labor market, personal debt obligations, and rising costs such as taxes and insurance [9] - Nearly 30% of FHA loan holders have outstanding student loans, which may be exacerbating their financial difficulties as payments have resumed [9]