- Key insight: The FHA tightened the screws on its borrowers by requiring a three-month trial payment period that is now fueling a surge in delinquencies.
- What's at stake: Thousands of borrowers face massive balloon payments, negative equity and soaring taxes and insurance payments as pandemic-era relief options are exhausted.
- Supporting data: "We need to expedite the liquidation of these properties," — Ted Tozer, the former president and CEO of Ginnie Mae.
Thousands of homeowners are falling behind on their mortgage payments and are headed to foreclosure now that the Trump administration has put an end to more than four years of pandemic-era relief for borrowers with mortgages backed by the Federal Housing Administration.
Foreclosures of FHA-backed loans jumped 28% in the first quarter compared with a year earlier, after the Federal Housing Administration put an end to Covid-era forbearance and relief programs on September 30, according Attom Data, a provider of property data. Servicers say they are now trying to manage a significant deterioration in loans and spikes in delinquencies that they expect to play out over the next six to 18 months as thousands of borrowers face foreclosure, a short sale or deed-in-lieu.
"We've reached a period of exhausted loss mitigation and there's no more to give," said Ron Malik, senior vice president of default operations at Dovenmuehle, an Illinois subservicer for midsized and large banks. "Exhausted loss mitigation is a real thing — there's no more relief."
In a major shift, the Federal Housing Administration began restricting borrowers to just one loan modification every 24 months. New FHA requirements that began in February require borrowers to complete a three-month trial period — to prove their ability to repay — before the FHA will finalize a loan modification. A change in how trial payment plans are being reported led to a surge in delinquencies and foreclosure filings.
"Over the last three to four years, we've really kicked the can down the road as far as forcing borrowers to deal with the inability to make their mortgage payment," said Ted Tozer, the former president and CEO of Ginnie Mae and a non-resident fellow at the Urban Institute's Housing Finance Policy Center.
In a financial stability report this month, the Federal Reserve System pointed to
"As of the fourth quarter of 2025, the early payment delinquency rate — the share of balances becoming delinquent within one year of mortgage origination — among near- and subprime borrowers remained somewhat above the median of its historical distribution," the Fed report stated.
Ginnie, a government-owned corporation within the Department of Housing and Urban Development, guarantees the timely payment of principal and interest to investors in mortgage-backed securities backed by FHA and other government loans.
The pandemic triggered unprecedented
Many borrowers now face "payment shock" because deferred balances have matured into large balloon payments. Some borrowers have negative equity because the total debt they owe including missed interest and other charges were added to the mortgage balance, effectively increasing the principal loan amount compared to the home's current value.
Chris Bennett, chairman at Vice Capital Markets, a Michigan advisory and secondary marketing firm, attributes some of the delinquencies to a big increase in down payment assistance programs when home prices were soaring.
"Down payment assistance programs are increasingly being paired with FHA first liens," Bennett said. "They have higher debt-to-income ratios so [the borrowers] are in a weaker position and they really are having to stretch to be able to buy the property, so that comes along with higher delinquencies."
There are more than 2,500 such programs, with hundreds of new initiatives launched in the past few years by federal agencies including Freddie Mac, state governments such as California, and private lenders like loanDepot. The programs have been largely successful in helping many first-time and underserved buyers overcome upfront costs to afford a home, Bennett said.
Meanwhile, property taxes and insurance have skyrocketed, in some cases rising by double-digits annually. Higher inflation and the expiration of student loan deferral programs are additional catalysts pushing borrowers into delinquency.
"There's a little bit of overspend on the consumer end from what we're hearing and seeing," said Malik at subservicer Dovenmuehle.
He noted that when a servicer goes through a verbal financial assessment with a borrower, more borrowers are bringing up a new expense category: buy now, pay later loans.
"There's this other unsecured expense that is incrementally cutting away at borrower capacity and whatever cushion they had has been eaten up," Malik said. "For student loans, they weren't paying anything and when you rip the Band-Aid off and say you have to pay, you can't be past due, that introduces another element."
At-risk borrowers that do get a final trial period offer have few options if they default other than repaying the past-due amount owed, or walking away gracefully through a short sale or deed-in-lieu.
State laws also create a massive divide on foreclosure speeds. While Texas offers a rapid, non-judicial timeline with foreclosures often completed in just a few weeks following an initial notice, New York's court-mandated process can drag on for several years. California sits somewhere in the middle.
"We know with a high degree of certainty that the inventory will continue to rise," Malik said. "That is something that we haven't seen yet, that will play very materially in the 12 to 18 months."
In addition, a change by Ginnie Mae in how trial payment plans are being reported has led to more loans being classified as delinquent.
Last month, Joseph Gormley, Ginnie's president, sought to offset a spike in delinquencies by
Servicers have not been getting an accurate picture of delinquencies because COVID-era policies remained in place too long, with few guardrails, said Malik. Many borrowers also got assistance during the pandemic from state housing agency programs that have expired.
The FHA policy changes late last year occurred simultaneously with the
Tozer is particularly concerned about servicer liquidity and the instability caused by the backlog of delinquent loans.
When a borrower goes delinquent and doesn't pay their mortgage, their servicer is contractually required to advance funds to Ginnie bondholders. These servicer "advances" cover principal and interest payments, but if they go on indefinitely, they can cause liquidity problems for servicers.
"You could have a flurry of independent mortgage banks that get in financial trouble," Tozer said.
The Financial Stability Oversight Council said in
Moreover, though Ginnie has a Pass-Through Assistance Program to help servicers make advances during temporary liquidity shortages, the agency expects servicers to exhaust all other forms of private financing before requesting such aid.
All the issues combined are significant, Bennett said, but they don't yet add up to a crisis. Servicing values are still rising as more servicers put a premium on their perceived ability to retain borrowers, he said. Many borrowers also have significant price appreciation, though more recent homebuyers may be underwater.
"All the folks that got their loans in 2020 and 2021 have, on average, seen about 20% to 30% or in some cases, 35% price appreciation since then, creating a really nice cushion," Bennett said. "Those that got their mortgages after this big surge in prices now find themselves in a number of markets actually underwater compared to the price that they paid for their house."
On top of that, FHA and HUD are understaffed after being targeted by the Department of Government Efficiency, or DOGE, for civil service
HUD has suffered massive reductions in staff, making it difficult to pinpoint its current headcount. Last year, the agency began aggressive reductions with a 13% cut to staff and subsequent plans by DOGE to reduce the total workforce by 50%, or roughly 4,300 employees. Mass layoffs, referred to as reductions-in-force, have been implemented across the agency as part of the Trump administration's broad government firings.
"We need to expedite the liquidation of these properties," said Tozer. "Just cleaning this backlog out could be a problem if FHA doesn't streamline its process to approve short sales and deeds-in-lieu."
