The housing market has a multi-billion dollar problem that nobody is talking about. Since the last recession economists harp on the fact that underwriting is so much better now than it was leading up to 2008. This is correct except for one lender, the federal government. While the private sector pulled back, the federal government jumped in with both feet. What does this mean for real estate values? Is the government portfolio of loans now a risk for the entire industry?
What changed in residential financing since 2008?
Prior to 2008, the FHA market share was around 4% of the total mortgage market, fast forward and now Federal Housing Administration (FHA) backed loans accounted for 11.4 percent of all loans in the fourth quarter of 2025, down from 14.1 percent the prior quarter and 15.3 fourth quarter last year. As the subprime mortgage market imploded in 2008 and 2009, these borrowers now are financed by FHA which has led to the explosive growth (source HUD). Essentially the government, and all of us the taxpayers, are now the largest non-prime/ sub-prime lenders
Why are borrowers choosing FHA over conventional loans?
FHA rates are between ½ to ¾% of a percent higher than conventional loans. On a 400k house this adds up to around 3k/year. Why are borrowers choosing to go FHA versus your traditional conventional mortgage? It is easier! FHA allows down payments as low as 3.5%, credit scores down to 580, and higher debt to income ratios.
FHA loans are considerably riskier for defaults
According to 2019 data from Core logic, the default rate of an FHA loan is over 3 time more likely than a conventional mortgage. Why? FHA loans are riskier loans due to decreased equity and decreased credit and income requirements. FHA is a subsidized “subprime” lender sponsored by the federal government and tax payers.
Currently we are seeing a surge in FHA delinquencies: Some 13% of people who took out Federal Housing Administration mortgages aren’t current on their loans, an increase from a year earlier, according to a report from ICE, the financial services company formerly known as Intercontinental Exchange. FHA loans are typically geared toward first-time buyers. There has been a big increase in FHA loans entering foreclosure.
To put this in perspective, the average delinquency rate of a conventional mortgage is around 3.9% today so the default rate of FHA mortgages is following historical patterns and approximately 3 times the default rate of a traditional mortgage.
Why track FHA loans?
With default rates on FHA loans substantially higher than traditional mortgages it is important to see where the majority of these loans are being made. The larger the amount of FHA loans in a particular area is a flag for increased defaults. 36% of all loans originated in 2001 ended up defaulting (Housing wire). If this occurred in a particular city/zip this would no doubt have an impact on surrounding properties.
How large is the risk to the economy and real estate prices from FHA loans?
As of the end of fiscal year 2024, the Federal Housing Administration (FHA) insured a portfolio of approximately 7.81 million single-family forward mortgages and roughly 287,000 home equity conversion mortgages (HECMs). This portfolio represents over $1 trillion in insured mortgage value, with the FHA facilitating over 793,000 new loans in FY2024 alone.
In essence, if 13% default as we are seeing today then that would mean 1 million properties are at risk of default. To put this in perspective, 2010 was the peak of the last housing crisis in terms of foreclosure. In 2010, approximately 1.2 million homes (1,200,000) were repossessed by banks, setting a record high for completed foreclosures during the housing crisis. While 2.9 million properties received foreclosure filings—including default notices and auction notices—roughly 1.2 million actually completed the foreclosure process.
Risk hiding in plain sight could put pressure on prices
Long and short, the huge surge in FHA loans is a material risk for the stability of the housing market. If 1 million FHA loans go into default when there is an economic downturn this would be a huge portion of the foreclosure market. Assume we hit a recession and the foreclosures are spread evenly over a 4 year period, this would mean an extra 300k foreclosures a year roughly a third of the foreclosures at the last peak during the great reset of 2008.
Unfortunately as the private sector learned its lesson in the last subprime crisis, the federal government continues to be all in on jumping into the subprime game with downpayments as low as 3.5% (or none if the borrowers get grants from various organizations). This will ultimately lead to a much higher default rate for FHA borrowers like we saw in the last recession.
The risk of a wave of defaults could cause a contagion effect and should not be discounted. Currently 13% of FHA loans are in some form of default and we are in a generally good economy with increasing real GDP, once a recession hits that number will easily double leading to a huge number of distressed sales where the borrowers are underwater (if they bought in the last 3 years). At the end of the day the flood of FHA foreclosures especially in lower/mid cost areas will cause a big reset in prices.
Although a reset is not imminent, there is a good possibility that FHA foreclosures cause a contagion effect with real estate prices in certain markets and submarkets.
Additional reading/resources
- https://www.morningstar.com/news/pr-newswire/20260212la86360/refinancing-drives-strong-fourth-quarter-for-home-lending
- https://www.wsj.com/personal-finance/americans-with-higher-incomes-are-starting-to-fall-behind-on-payments-472d3a24?mod=mhp
- https://www.fairviewlending.com/washington-inflates-credit-scores-and-another-housing-bubble/
- https://www.fairviewlending.com/2026-real-estate-predictions/
- https://www.fairviewlending.com/when-will-real-estate-crash-or-will-it/
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Glen Weinberg personally writes these weekly real estate blogs based on his real estate experience as a lender and property owner. I’m not an armchair reporter/writer. We are an actual private lender, lending our own money. We service our own loans and own commercial and residential real estate throughout the country.
My day job is and continues to be private real estate lending/ hard money lending which enables me to have a unique perspective on the market. I don’t accept any paid sponsorships or ads on my blog to ensure accurate information. I’ve been writing this for almost 20 years and have over 30k subscribers. Please like and share my blogs on linkedin, twitter, facebook, and other social media and forward to your friends 😊. I would greatly appreciate it.
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Written by Glen Weinberg, COO/ VP Fairview Commercial Lending. Glen has been published as an expert in hard money lending, real estate valuation, financing, and various other real estate topics in Bloomberg, Businessweek ,the Colorado Real Estate Journal, National Association of Realtors Magazine, The Real Deal real estate news, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.
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