The financial devastation of the coronavirus pandemic continues to hurt homeowners, but government programs have so far held foreclosures at bay.

A recent report by the American Enterprise Institute (AEI) analyzed the potential risks from reported FHA loan delinquencies. FHA loans, which are insured by the Federal Housing Administration, are designed to help low- to moderate-income households buy homes. The insurance provided to lenders helps reduce their risk and therefore offer loans to borrowers with a lower credit score and less cash for a down payment. The borrowers pay mortgage insurance for the entire loan term unless they make a down payment of more than 3.5 percent.

AEI reviewed FHA loan delinquencies to determine whether housing markets risk a wave of foreclosures as forbearance programs come to an end. In June, the FHA announced extensions of their loan forbearance for three months for borrowers who requested forbearance between July and Sept. 1, 2020. In addition, FHA borrowers who are not currently in a mortgage relief program can request forbearance on their loan payments between now and Sept. 30 to receive a six-month reprieve from loan payments.

While AEI’s report identifies metro areas that are the most at risk from high percentage of FHA delinquencies, the researchers don’t anticipate a wave of foreclosures similar to the housing market crash of 2007-08. Borrowers are currently receiving assistance and may be able to transition into loan modification programs with the option of deferring past-due payments until the end of their loan term.

In addition, home prices have been rising rapidly in recent years, which means that homeowners are more likely to be able to sell their home with enough proceeds to pay off their loan and closing costs rather than face foreclosure. If many of these borrowers with delinquent FHA loans opt to sell as forbearance ends, there will likely be an increased supply of homes for sale in the areas with high levels of FHA borrowers.

According to AEI, approximately 14.7 percent of the 7.6 million FHA borrowers were delinquent in May and 10.5 percent were seriously delinquent (90 days or more past due), compared to 17.4 percent in September 2020 who were delinquent and 11.8 percent who were seriously delinquent.

The 10 cities at risk because of a large percentage of FHA loans overall and a high percentage of delinquent or seriously delinquent loans include:

1. Atlanta

2. Houston

3. Chicago

4. Dallas

5. Washington

6. Baltimore

7. Riverside-San Bernadino, Calif.

8. San Antonio

9. Fort Worth

10. Philadelphia

In the Washington area, 15.8 percent of all mortgage loans were delinquent as of May 31 and 14.5 percent of loans were seriously delinquent. FHA loans represent 13.7 percent of all loans in the metro area.

AEI’s research found that in the Washington area neighborhoods with a high concentration of FHA loans are also areas with a higher share of minority borrowers and higher debt-to-income ratios, which compare the minimum payment on all recurring debts with gross household income.

Currently, the area with the highest concentration of mortgage default risk and FHA loans is Prince George’s County, which was the hardest hit county in the D.C. area during the foreclosure crisis. For the full report, click here.

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