On today’s episode, Editor in Chief Sarah Wheeler talks with Lead Analyst Logan Mohtashami about FHA loan delinquencies and the risk they pose to the housing market.
Related to this episode:
Housing Market Tracker
https://www.housingwire.com/tag/housing-market-tracker/
Enjoy the episode!
The HousingWire Daily podcast brings the full picture of the most compelling stories in the housing market reported across HousingWire. Each morning, listen to editor in chief Sarah Wheeler talk to leading industry voices and get a deeper look behind the scenes of the top mortgage and real estate stories. Hosted and produced by the HousingWire Content Studio.
Related to this episode:
Housing Market Tracker
https://www.housingwire.com/tag/housing-market-tracker/
Enjoy the episode!
The HousingWire Daily podcast brings the full picture of the most compelling stories in the housing market reported across HousingWire. Each morning, listen to editor in chief Sarah Wheeler talk to leading industry voices and get a deeper look behind the scenes of the top mortgage and real estate stories. Hosted and produced by the HousingWire Content Studio.
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NewsTranscript
00:00Welcome, everyone. My guest today is Lead Analyst Logan Modashami to talk about FHA
00:11loan delinquencies and the risks they pose to the housing market. Before we dive in,
00:15I want to say thank you to our sponsor, Optimal Blue, for making this episode possible. Logan,
00:21welcome back to the podcast.
00:22It is wonderful to be here, Sarah. It's going to be a very funful day. We have new
00:28home sales coming out very shortly. I've got to go on CNBC right after that report
00:32and talk about the builders. Like we talked about before the year even started, the wild
00:38card for the economy before tariffs and everything else happened. By the way, tariffs on, tariffs
00:44off, high reciprocal percentages, lower reciprocal percentages. I encourage everyone to go back
00:51to our November 7th podcast. Pretty much a lot of the things that are happening now shouldn't
00:57be surprising, but it's going to be a very interesting four years.
01:03It is indeed. Okay, well, let's talk about something that I've been hearing about for
01:07a couple of months. You hear all the time on social, and it's a concern people have
01:13over FHA and FHA delinquencies. Specifically, are we about to see a big crash in those loans?
01:24Here's the thing. Mark Zandi, who's a well-known economist, probably a little bit more on
01:30the progressive side, came out yesterday and said, well, even though FHA loans aren't that
01:37big as a percentage and most of the loans in America, I think the latest data from ICE,
01:45even accounting for the FHA delinquencies, it's 3.53%. We're still about 32 basis points
01:53below the 2019 levels. Is that the housing bubble 2.0? Is this a lot of professional grifters,
01:59especially men? There's a lot of men out there who just throw out hope. Sarah, you know why I
02:06want to debate these people. Because once you get a man and you force a man to write their name,
02:11and they have to show their face, like all these scrub people running around hiding behind goofy
02:16accounts, when a real man has to actually write their name down and their children and their wife
02:20and their spouse, I mean, everyone has to see it. Then you ask them for their models, it's over.
02:24And then every time that guy speaks, everyone knows, clown. It's not serious, right? But Mark
02:30Zandi is a very well-known economist, and he upped his recession forecast because he said
02:35there's credit stress. Now, we've seen credit stress in the data for some time now, credit
02:40card delinquencies, auto loan delinquencies. When you break down the data, a lot of renter
02:48financial profiles, a lot of single households out there. But the economy is still expanding.
02:54I mean, it's been like, what, two and a half years now that we've been talking about credit
02:59stress. We always said the Fed doesn't really care about this. It's weird to say that, but they look
03:05at the credit stress as a non-event. As long as the middle class and the upper middle class are
03:11consuming goods and services, then they have to be worried more about balancing the economy.
03:17The whole labor over inflation thing. But Mark said that this is a canary in the coal mine. I
03:23would label it this way. Obviously, those who've known me since 20, I am super conservative on
03:30lending. I even wrote back in 2012 and 2013 that FHA should raise its down payment. I would love
03:39to see FHA take a fully qualified mortgage mindset into their underwriting, but it's really
03:47designed for kind of the lower quality credit. Now, the scale of loans that have been done over
03:54the last 14 years, it's really households that are really good. And it's like the exact opposite
03:59of what the run-up from 2005 to 2008 is. But the question is, is this going to break the economy?
04:08A lot of the people that are very advocate of highlighting the FHA delinquencies are mostly,
04:15what I would say, anti-central bank people or anti-government, and they believe that the
04:19government is propped up housing. In theory, if you took the government out of the equation,
04:27the economy wouldn't be functional. The public and private sector have always worked together
04:33in America post-World War II, and that's typically why you have inflation. The economy grows,
04:39population grows, that's an inflationary economy. A deflationary economy is an economy that does
04:46not have demand, too much supply, like China. China's economy has been a mess. They have
04:53so much capacity and not enough demand. It's, in a sense, a deflationary environment.
04:58But is FHA really the housing bubble 2.0 that some people have been talking about? Because I
05:06see this, every day people send me this stuff, and I'm like, there's 51 million loans here,
05:12and that's not it. So number one, always remember, there's 1% to 4% of some type of stress
05:20in all delinquency data. This is why we like to show those total balanced delinquencies,
05:27so you could kind of see. It never goes to zero. It's like jobless claims. Jobless claims never
05:31go to zero. Unemployment doesn't go to zero. There's a natural progression of people losing
05:37their jobs or being in some form of stress. Credit card stress, auto loan delinquencies,
05:43all these things are at elevated levels. But the economy is still expanding. So was it
05:48correct for Mark Zandi to up his recession percentage? By the way, we despise percentages.
05:58We don't believe that's a very useful concept. But the mythical 40% is coming. He upped it to 35%.
06:06So we're going to go into the structural dynamics of, is FHA the housing bubble 2.0?
06:14Okay. So let's start first with what you said about the percentage and that we're
06:19not even at 2019 levels. At what point would you start to worry?
06:23So basically, if we're talking about a structural systemic risk to the entire American economy,
06:31by the way, if that was going to be the case, there'd be things done. We've always highlighted
06:37what we saw in the past. 2005, 2006, 2007, and 2008 foreclosures and bankruptcies were rising
06:49for years. Then the job loss recession happened. But back then we had a massive credit sales boom.
06:59Like it was unbelievable. Adjusting to inflation, like mortgage debt just exploded.
07:04None of that's happening. None of that has been happening for 14 years. So I can't compare that
07:11period to this period because we never had a credit or sales boom. Also, if you're worried
07:17about systemic risk of major underwater homes or people selling their homes for losses and
07:24foreclosures and bankruptcies where people's lives are going to be hit structurally for 7 to 10 years,
07:31you'd probably need a very high percentage of underwater. Oh, wait. It was 23% plus back then.
07:40Under 2% now. So that's not a concern. The loan to values back then in 2008,
07:47when we saw this massive credit stress buildup, 85%. 46.6% now. Don't have the math.
07:54Don't have the math. So I'm not worried about that. All the housing bubble 2.0 people,
08:00or the same housing bubble 2.0, it's the anti-central bank movement people. But
08:05late cycle lending, oh, you have my blessing on that. So how I've always described FHA is
08:12basically similar to how Mark Calabrio. When you get late in a cycle, you tend to push credit a
08:20little bit more aggressively, right? Because you're trying to create more business. Late cycle
08:28lending risk to me is always going to be an FHA story. So in that process, you're already seeing
08:34credit stress build up. As a percentage, like as a total percentage, it's very small. But in this
08:39category, those households, a lot of people say that the loan modifications is inflating home
08:44prices. That if the government has stayed out of this home price, that's silly. It's not that big
08:49of a percentage of homes out there. But for these households, when you go into a job loss recession,
08:56and a lot of people say, how do you have like 110 LTVs or 125% LTVs? Well, imagine you had an FHA
09:02loan. You don't have a very big down payment. You have the upfront mortgage insurance embedded into
09:08the loan. Then you have a solar panel loan or construction loan. Your LTV is high. Those
09:14households will always be at risk of a foreclosure because they do not have the nested equity.
09:22And when that happens, when you get into the foreclosure process, it's going to be a while,
09:27right? We always say minimum nine to 18 months. If you're trying to filtrate inventory data,
09:31you have to use that correct model. Very few people do that. But those households, I would say,
09:38are at risk. And once you get a foreclosure, I mean, you're talking years and years that your
09:42credit is going to get hit. So late cycle lending risk, you have my 100% blessing.
09:50I mean, we wrote that article in 2023 where we're telling people we should abolish the 0%
09:56neighborhood loan financing. Like, just take it away. Don't let it happen in that. So make that
10:05the case. Don't go into the housing bubble 2.0 nonsense. I mean, you just don't have the scale
10:12there. So in that context, I think the late cycle lending is a very, very sensible way to talk
10:19about it. The housing bubble 2.0 or the government is, you know, without the government, you know,
10:25we never did these loan modification home prices because it's stupid. It's silly. It's not
10:29sophisticated. It's not educated. It's not talented. It's fanatical. That's not how it
10:34works. The scale of loans is very small. But for those households, late cycle lending risk
10:40has always been there. And this is my fight for the last 13, 14 years.
10:45Lending in America is not tight. As long as FHA is alive and breathing, that is a very,
10:53very liberal lending standards, you know, to get very high debt to income ratios, to get
10:59very low down payments. It's there. It's not a very big portion of the loans, but that is a
11:04legitimate risk. So Mark Zandi put his recession risk a little bit higher just because of that.
11:11I would argue that if you're seeing credit risk happen for those households, imagine what it's
11:16going to look like when the job loss recession happens. That is a legitimate discussion. Move
11:21it into that area than trying to make the credit boom and bust, you know, of the 2002 to 2011
11:30housing market. OK, well, let's move it into that area. OK, what does it look like? We have
11:35this late cycle risk. We have potential job losses coming. We do have a lot of uncertainty,
11:42you know, tariffs on, tariffs off, whatever you want to say there. But apart from that,
11:47I mean, we just, you know, we were already, you know, slowing down in some ways. So
11:51let's talk about that. Let's talk about your recession mindset right now.
11:55So we've always it's interesting when Mark Zandi brought that tweet out, guess what I did, Sarah?
12:03Could you imagine what I did? I know what you did.
12:07I basically retweeted him and said, I've got a better housing indicator, recessionary indicator,
12:14and this is a little bit more efficient. And it's residential construction workers. And we're
12:19sitting here in 2025. The recession hasn't happened. And look, it's the one data line
12:23that hasn't broken yet. So, I mean, listen, there could, in theory, be a job loss recession without
12:30residential construction workers being laid off. And I could create a bunch of hypothetical
12:38backdrops for that to happen. But so far, manufacturing that has not broken.
12:43So we are on watch. But until we see some of the labor triggers that jobless claims,
12:50we don't want to go into the kind of the R word. Right. Because you don't want to be that person.
12:55And what's what's happened the last few years is you had a lot of people just screamed recession,
12:59recession, recession, recession, and it didn't happen. And they're doubling and tripling,
13:03quadrupling down. And then you just it's not it's not not the case. We have models. We have
13:09history models. We track these things because recessionary data is actually not that difficult
13:15to see. But you need the labor trigger. So I'm not there. Right. I don't I don't even go there.
13:21Also, the 10 year yield would be like the bond market has always tried to get ahead of the Fed
13:26on things. So we're not there yet. As all of you can see, a month ago, we talked about this is a
13:30very tough level, like four, 15, 14 to break. The labor data has not broken in the in the data lines.
13:38So the bond market is still up here, but not there on the recession. But if we wanted to make
13:44a late cycle lending housing FHA thing risk, I implore everyone, you're going to see it in the
13:52new listings data. Forget what every person says out there. If they do not have access to new
13:59listings data and give you a historical perspective, then they are not housing analysts. They are not
14:06economists. They are stock traders or YouTubers or TikTokers or. Oh, God, I've seen it all.
14:16So when we see stress in the data lines like we saw in 2008 to 2012, new listings data vertical.
14:24Why? Because those homes in scale. So forget about delinquencies. If you're thinking about
14:30supply, you'll see the new listings data and it will continuously go up because you're working
14:34from such low levels. The tracker data was very good in this new listings data slow down just a
14:43smidge, but I'm not that far away from getting my eighty thousand. We don't see the stressed
14:49sellers that we saw back during the housing. And that's that's it. All you have to do is focus on
14:54the new listings data because it's it's actually a tangible variable that actually means something
15:00because that's an actual home coming to the marketplace. We take the existing home sales
15:06report, the NAR's total active listing one point two four million normal two to two and a half
15:11million not showing it their new listings data. We're just trying to get back to a normal 80 to
15:17one hundred ten thousand during the peaks. We're getting there. But if you're if you're thinking
15:22about FHA, think late cycle lending. Then you want to focus on the new listings data and then the
15:27active inventory. We're just we're quite don't have that scale yet. And always remember, you
15:33start the process from a 30 day late. If that goes throughout, it's minimum nine to 18 months before
15:39that before that happens. So if you wanted to say the government's going to take away all the loan
15:43modification process from FHA, still it has to be like nine to 18 months of foreclosure process,
15:49new listings data. Then you go with that. OK, and just remember that the scale of the loans right
15:56have a lot of equity in them because the scale of the loans, it can't be a housing bubble two
16:02point of things because you don't if you had, you know, 20, 30, 40, 50 percent equity in your house,
16:07you don't necessarily can sell your house for foreclosure when you have that kind of
16:10nested nested equity. OK, so that brings up the part that people feel like part of the way that
16:19this is sort of being hidden or is not completely obvious is because those people who are in that
16:25cycle, they keep going back into a loan modification cycle. So if we didn't have that sort of overlay
16:32on it, we would see the data. And it's still too small. It's still it's way too small for the if
16:39you're trying to compare it to the housing bubble 2.0. But again, even with the delinquencies of FHA,
16:46we're still 32 basis. I mean, I would tell you that one of my calls during COVID is that the
16:51foreclosure bankruptcy data would trend back to pre-COVID levels that hasn't happened yet. So I
16:57can make a case that this is part of that. It's still too small. It's you want to focus on that
17:03household. It's just not big enough to take the big scale. And this is why the Federal Reserve
17:08doesn't really look at this in that fashion. But for those households, yes, you would start
17:16necessarily the foreclosure process on that. And especially if they don't have any selling equity
17:22or their LTVs are above 100 percent, that's a foreclosure risk. That is a late cycle lending
17:29foreclosure risk. That makes sense. That's perfectly normal. You don't have to do the
17:32housing bubble 2.0. You don't have to say home prices naturally are inflated because it's very,
17:36very small percentage of stress. You'll see it in the data so easily. Like when it happens,
17:44let's just say we're going to have a massive wave of stressed loans and
17:48sellers coming. It'll be so evident in the data like it was back then. It's just not here. So
17:54late cycle risk, yes, small. It's just 51 million loans out there. The general housing financial
18:02profiles of homeowners look unbelievably good. And we always say that a lot of people say,
18:07well, there's FICO score inflation. That's nonsense. The FICO score data has literally
18:10stayed the same for 14 years. Like it changed. And there was no massive improvement for homeowners.
18:18For renters, you could say it. But the scale data for 40, think about this,
18:22something has been consistent for 14 years. Why? Because qualified mortgage took that. Now,
18:26do you have that for the FHA loans? No. But the scale of the loans, the things that actually
18:31matter. And I would argue that's what the Federal Reserve would tell you, that we're seeing stress
18:37households that we don't think are that important to the general economy. Because if we did,
18:43we would be a little bit more dovish. Well, we always say that the Fed doesn't care about the
18:47credit stress until the labor market breaks. When the labor market breaks, then they're going to go,
18:51oh my God, I go to see it happening. But I think when you get a job loss recession,
18:57you're going to see those things pick up a little bit more because you're going to have more people
19:01unemployed. So if you have credit risk already, but in general, households, not that big of a
19:08story. So if I'm out here and I'm not thinking, oh, it's going to be a 2.0, housing crash 2.0,
19:18but I am worried about that late cycle lending risk, what does that mean to our industry?
19:25You're like, yeah, that is something that you could conceivably be worried about.
19:31What's the effect if you're out there and you're a lender and you're a real estate agent,
19:36what effect does that have on you? Well, if you are, in a sense,
19:42I mean, technically, if you give a loan to a high risk FHA and it comes back
19:49as a delinquent in a very short amount of time, the government, which I think is going to happen,
19:55it's going to start taking a little bit more careful look at the percentage of loans that
20:00go into delinquencies if you're tied to a certain bank. So if you're a lender that's
20:06really pushing FHA loans the last two years, and you're really pushing the debt to income ratios,
20:13in the future, I think they're going to be a little bit more mindful of, hey, listen,
20:20your loans have a very high percentage of... So what I could see happening is credit restriction
20:27coming back or credit getting tighter with FHA lending. So if you're in a real estate or
20:35mortgage space, in the future, you can get more credit tightening. For example, they could say,
20:42we're not going to do any more loans with above 43% debt to income ratio. That is something that
20:48could possibly happen in the future. Something like that can be material to somebody in the
20:53industry if you're leveraged to very high above qualified mortgage debt to income ratios out
21:02there. But outside of that, in the scale terms, if mortgage rates fell 1%, really, we'd be talking
21:10about mortgage rates and housing demand picking up. That's why you have to be mindful of the scale
21:15data. And we always say that the 1980s, early recession, home sales crash, recession happened,
21:24inventory was so much higher than it was right now. But mortgage rates fell 2.5%,
21:29housing demand picked up. We had back-to-back recessions in a very short amount of time.
21:36Rates fell, demand picked up, home sales went up. That would be more of the bigger story.
21:41But in this context, if you're tied to FHA lending and you're doing very high debt to
21:46income loans, you could see the government say, hey, listen, this is not working for us.
21:53That's something down the line. Late cycle lending and credit restriction is a legitimate story.
21:59One of the reasons why I didn't want the GSEs to leave conservatorship is that if they're publicly
22:03traded companies, credit can get tight, right? If there's no backing by the government. I still
22:10think even if they pull this off, there's going to be a backing from the treasury. But credit
22:16could get tighter. That means everyone in the industry, you get less credit availability.
22:22That is a legitimate discussion to have. That is a legitimate discussion to have. Okay.
22:27Anything else you wanted to talk about that with the recession?
22:30I mean, just the tracker. It's the first time on our weekly tracker data. How I show it,
22:35I have the monthly weekly tracker. You could see the demand pickup. But if I shorten it to
22:40week to week data, it's positive year of year. So with everything that we know now,
22:47mortgage rates still above 6.64%. The curve is slightly positive. It's nothing spectacular.
22:54It's like barely. But it shows you if mortgage rates fell towards 6%, you could grow sales.
23:01For us to have that here, which we didn't have last year. And to me, it's just like you found
23:09that bottom. We've talked about this for many, many years. There's just this 4 million level
23:14that is always held post 1996. It doesn't really break below. You can have some monthly sales below
23:20it. You can have some monthly sales above it, but it's basically has held the last two years.
23:25But if you're showing forward looking data, that's positive year over year now,
23:29with rates still above 6.64%. Imagine what happens. Hypothetical, let's just say 5.75
23:36in a quarter, 12 months. Sales are rising. Isn't going to be great. Isn't going to be spectacular,
23:41but sales can grow. And this is why I say this period in time reminds me a lot of the early 1980s.
23:48Inventory growth, good. New listings data is good. I'm going to get my 80K. If I don't get
23:54my 80K this year. But it was a very positive weekend for the tracker. And you have to remember
24:02that you don't fall into the trap that, oh my God, supply is rising. Everything's terrible.
24:09Supply is at an unnatural level. This is why the whole team higher rates, savagely unhealthy.
24:15We have to get something back to normal. Normals are positive because price growth is cooling down,
24:20price growth cooling down positive. Housing market has to be here for a very, very long time.
24:25And what I'm seeing in 2024 and 2025 for the first time in a while, not unhealthy,
24:32right? Not savagely unhealthy. This is the way it should look out there. And if rates do fall,
24:38housing demand picks up. We're in a much better spot to handle that at this stage.
24:45I just don't think we have pro-growth monetary policies as for many, many years, the Federal
24:52Reserve has kind of just threw the housing market away and focused on other things.
24:57But when that time does come, we're in a much better spot.
25:00I love it. And I would tell all our listeners, if you want more information,
25:04Logan goes through what, eight, nine, 10 different data lines every weekend on the
25:09housing market tracker. And you can find it at housing market tracker on the housing market.
25:15The tracker is designed to keep everybody in a sanity world and weekly inventory,
25:24new listings data, price cut percentages, 10-year yield, purchase application data,
25:29pending contracts, what's going on with the economic data in the following week.
25:34We keep everyone in line to the real world because out there, y'all are crazy.
25:40Y'all are some crazy people out there. And it's a crazy world already. We got a lot of
25:46crazy stuff going on, but out there, this way, if everybody read, Sarah, if people read,
25:52a society like the dark ages, man, you couldn't even draw something on the sand.
25:58They'd kill you for that. But if a country, if a civilization, if humans read, and then they're
26:03like, oh, that's what the data is, then you don't fall into the trap of fanatics.
26:10And this is the history of human civilization, thousands of years going back to the Peloponnesian
26:14War. There's always been demagogues and people who just try to focus on people who don't read.
26:19And our job is to teach. And it's just the most beautiful thing, a society reading and
26:24seeing data and everything. I know a lot of people love to do that. But if you look at it in that
26:29light, then fanatics kind of go to the side. It's true. I'm so glad we got a Peloponnesian
26:35War reference in this podcast. It's been, I don't know, it's been like a week since I heard the
26:39Peloponnesian War. I needed it. Yeah, one day we'll do a whole podcast on the Peloponnesian
26:44War. That'll be fun. We'll do it. Yes, let's do it. I'll have to do some reading. Logan,
26:49thanks so much for joining us. I will see you on CNBC here in a little bit. But
26:53thanks for being on and I'll talk to you again soon. My pleasure.