Distressed by Design: FHA—Does Affordability Create Unaffordability?

Dain Ehring, Sept 2025

In spring this year, the Wall Street Journal published an editorial, “Biden’s Mortgage ‘Relief’ Fuels Higher Housing Prices.^[1]” In the article, the editor blames the FHA's lax underwriting standards and loss mitigation for keeping people in homes they cannot afford, which drives up home values.

“In 2007, 35% of new FHA borrowers had debt-to-income ratios above 43%. By 2020, 54% did. As housing prices and inflation surged, borrowers became more stretched. The FHA kept to insure mortgages for borrowers who were increasingly leveraged. About 64% of FHA borrowers last year exceeded the 43% threshold.”

[..]

“Under the guise of Covid relief, the Biden administration masked the growing troubles in the housing market by paying off borrowers and mortgage servicers to prevent foreclosures. Of the 52,531 FHA loans last year that went seriously delinquent within their first year, only nine resulted in foreclosure.

I don’t believe that’s accurate. Making homes affordable for FHA homeowners, even if they become distressed, isn't responsible for making home prices unaffordable, nor is it poor federal policy. But she’s right—the FHA loans are under increasing pressure, home prices are soaring, and housing affordability is at an all-time low, and it’s not good politics to talk about it.

The underwriting practices of the FHA have little impact on the housing market's affordability. Approximately 50.8 million outstanding residential mortgages are being serviced in the U.S., representing $11.7 trillion in unpaid loan balances. Traditionally, FHA lending has accounted for only about 10% of mortgage origination; however, as of 2024, this percentage has increased to between 15% and 18%. This rise is attributed to the sharp decline in refinancing activity, which complicates the measurement of FHA participation in overall lending.  In 2020, approximately $4.5 trillion in mortgage originations was generated, but by 2024, that figure had decreased to $1.6 trillion. First-time home buyers now make up 25% of the market, down from 33% before the pandemic.

FHA lending is designed for first-time homebuyers with lower credit scores, lower incomes, and limited savings. FHA loans require mortgage insurance (MIP) for the loan duration, which the homeowner pays. MIP costs 1.75% of the loan upfront and typically 0.55% annually. When a borrower defaults and the loan goes into foreclosure, the lender files a claim with the FHA to cover their losses. The Mutual Mortgage Insurance Fund (MMIF) reimburses the lender for eligible losses. After foreclosure, the lender must cover any outstanding debt, as well as the costs of foreclosure, including legal and field services, and any necessary repairs.

Why do banks and the federal government (taxpayers) take on these risks? For good reason. The purpose of FHA loans is to provide low-down-payment options, making homeownership more accessible to low- and moderate-income borrowers. It targets first-time buyers, minorities, and the underbanked.  In contrast to what the editorial implies, the FHA does not inherently create market instability; instead, it provides a counter-cyclical buffer by increasing lending when private mortgage credit tightens.  During the COVID-19 pandemic, FHA lending remained available.  FHA lending encourages urban development and revitalization.  FHA loans are often used in underserved urban areas, supporting community revitalization and reducing housing vacancies.

Those goals can have negative impacts on market stability, specifically a higher risk of defaults, foreclosures, and moral hazard due to enabling overextended credit, which places a burden on taxpayers if the MMIF becomes depleted.  For example, in 2013, the FHA required a $1.7 billion bailout from the Treasury due to high foreclosure rates from post-2008 loans. Lastly, like all thing’s government, it can create market distortions and diminish private mortgage innovation. 

The rise in housing prices is primarily due to factors more significant than FHA lending guidelines. It chiefly results from a slowdown in homeowners selling their homes to purchase new ones.  This flow in the system has been significantly slowed. Homeowners who typically sell their homes and use their increased equity to afford a larger home or relocate are holding back due to the rapid and severe rise in interest rates, which have almost tripled since 2020. There is nowhere for first-time homebuyers to go if they purchased their house before the increase. This results in a significant reduction in inventory. In 2019, 5.34 million existing homes were sold compared to 4.08 million in 2024, marking the lowest home sales level in nearly 30 years^[2].

There is also increased pressure on the lower inventory, primarily due to four factors: new family formations, changes in work-from-home policies, a significant rise in rent prices, and a scarcity of assisted living options. For example, a Redfin study indicates that asking rents for apartments have risen by 26% from 2020 to 2025, while single-family home prices have increased by 41% in the last five years. Additionally, the growth of post-pandemic families is notable – marriage rates are at their highest since 2018, and return-to-office policies are in effect.

In 2025, the housing market continues to struggle, but the outlook is improving, indicating potential for recovery. Homebuyers and the media recognize that the US is not facing a housing bubble similar to the one that occurred in 2006-2008. First-time mortgage borrowers are increasingly eager to confront the challenges of low inventory and relatively high interest rates as an alternative to rising rent costs, which have led to record-high tenant delinquency rates. They are confident that rates will come down and can refinance when that happens.

FHA-insured mortgage lending is inherently a political policy. It is under pressure by design. It aims to offer an avenue to the American Dream for the underserved, an avenue that would not be available without FHA assistance. Home ownership is the top mechanism for increasing individual wealth. FHA makes it possible for more.  Numerous studies affirm the positive impact of financially stable households on the overall US economy, benefiting everyone. The risk to the housing ecosystem is contained by keeping volume low. Homeowners share the burden of underwriting risk through monthly insurance premiums added to their mortgage payments. Defaults are anticipated to be higher. Even during difficult times, keeping all homeowners in their homes contributes to a healthier economy and quality of life. 

^[1] Feb 23, 2025, Ms. Finley WSJ https://www.wsj.com/opinion/bidens-mortgage-relief-fuels-higher-housing-prices-policy-loans-risk-cb0a1974?reflink=desktopwebshare_permalink

^[2] (Nicole Friedman, WSJ, Jan 24 2025).