The Federal Housing Administration is siphoning record amounts of cash from its mortgage insurance fund and could survive the housing crash without a bailout from taxpayers, the agency said in its annual report to Congress on Dec. 31.
But with FHA loan delinquencies on the rise and more homebuyers taking on budget-squeezing monthly mortgage payments, the Trump administration is considering tightening underwriting requirements for borrowers with multiple risk factors.
FHA has also streamlined the process for initiating foreclosure proceedings against homeowners who repeatedly fail to make payments.
The FHA Mutual Mortgage Insurance (MMI) fund, which protects mortgage lenders in the event of a borrower default, rose 9% to $189 billion during the fiscal year that ended Sept. 30, HUD reported.
But FHA’s “continued assistance to America’s homebuyers requires strong oversight of the MMI Fund to protect taxpayers from unnecessary risk,” Housing Secretary Scott Turner said in the report’s foreword on Dec. 31.
Insurance fund capital ratio hits record high
Source: FHA 2025 Annual Report to Congress.
As a result of the subprime housing crash, MMI funds’ capital ratios fell below the legal minimum of 2% from 2009 to 2014, requiring a $1.69 billion taxpayer bailout.
Since then, increased FHA insurance premiums and improved housing market conditions have facilitated fund replenishment, resulting in the company maintaining a record high capital adequacy ratio of 11.45%, more than five times the legal minimum, for two consecutive years.
The Mortgage Bankers Association argues that FHA’s “robust capital reserves” could justify providing some relief to homebuyers by lowering FHA premiums, as the Biden administration did in 2023.
“Such changes must be calibrated responsibly and informed by a careful evaluation of the program and the economic factors behind the serious increase in delinquency rates to ensure the safety, soundness and sustainability of the program,” MBA Chancellor Bob Bruksmit said in a statement.
FHA’s stress tests show that if there is another Great Recession-level recession, the insurance fund’s capital adequacy ratio would drop to 4.42%, more than twice the minimum set by Congress.
But private mortgage insurance companies that compete with FHA say that if FHA’s insurance funds had to meet the same standards, FHA would be considered $32 billion undercapitalized.
“FHA must maintain sufficient capital to perform its important countercyclical functions in the U.S. housing market and to ensure that mortgage credit is accessible to those who cannot secure financing through the private capital-backed conventional or portfolio mortgage markets,” US Mortgage Insurers, an association representing private mortgage insurance companies, said in a statement.
Private mortgage insurance companies compete with FHA and VA loan programs to serve homebuyers who cannot make large down payments. Fannie Mae and Freddie Mac require private mortgage insurance if homebuyers make a down payment of less than 20 percent.
According to an Urban Institute analysis, FHA premium reductions in 2015 and 2023 made FHA loans more attractive for many borrowers than conforming mortgages with private mortgage insurance (down payments less than 5%).
But the analysis found that borrowers with FICO scores of 700 or higher often get better deals by taking out conforming loans backed by Fannie or Freddie with private mortgage insurance.
In the fiscal year that ended September 30, FHA backed 876,502 mortgages totaling $275 billion, bringing the total number of mortgages insured to more than 8.1 million with an outstanding principal balance of $1.6 trillion.
The 2026 FHA loan limit increases by 3.26%, allowing FHA-certified financial institutions to finance single-family home purchases of up to $541,287 in low-cost markets and up to $1,249,000 in high-cost markets such as New York, San Francisco, and Washington, D.C.
However, delinquency rates for FHA loans are on the rise, making them more than five times as likely to miss payments than borrowers who rely on traditional loans backed by Fannie Mae and Freddie Mac (Government Sponsored Entities, or “GSEs”).
FHA delinquency is on the rise
Mortgage delinquency rates by loan type. Source: ICE Mortgage Monitor, December 2025.
Data tracked by ICE Mortgage Technology shows that FHA borrowers were nearly 12% delinquent as of October, compared to an average of 3.34% for all mortgage holders and less than 2% for loans backed by Fannie and Freddie.
According to ICE data, FHA buyers start with less equity in their homes, making them more likely to end up underwater or in foreclosure when home values decline.
Stricter qualifications for loan modifications
To reduce risk to future claims, FHA announced in April that it would tighten eligibility requirements for programs aimed at helping struggling borrowers.
The new rules, which took effect Oct. 1, require seriously delinquent borrowers to successfully complete a trial repayment plan before being granted a more generous “permanent” solution, such as a loan modification.
Borrowers who have been granted a “permanent homeownership option” in the past two years are no longer eligible to receive a new homeownership option due to the previous 18-month limit.
The FHA said in its annual report that it wants to avoid “cycles of redefaults and interventions” that increase losses.
“While early COVID-19 loss mitigation interventions were relatively successful, FHA is currently experiencing re-default rates approaching 60 percent, which is unsustainable and detrimental to MMI funds,” the agency reported.
Before the pandemic, only 2% of FHA borrowers had been granted two or more home retention options in the past five years. By September 2025, this number had risen to 40%.
Going forward, borrowers who default within 24 months of receiving a loss mitigation homeownership option “will no longer be eligible for additional homeownership options and will be subject to a more expedited process through loss mitigation, disposition, or foreclosure, as appropriate,” the report states. “These loans are expected to close early. As a result, FHA expects default and claims rates to increase in the near term.”
But in the long run, FHA said it expects to save $1 billion by resolving “serial repeat default cases.”
Cautious eyes on “risk multi-layer financing”
In addition to “restoring common-sense safeguards to mitigate losses,” the FHA says it is “working to correct an emerging trend in risk-tiered loans” made to borrowers with multiple risk factors, including low credit scores and high loan-to-value (LTV) and debt-to-income (DTI) ratios.
The agency found that such “risk-tiered loans” default on early payments at nearly three times the rate of other loans and have loss rates 2.5 times higher.
The average credit score for FHA loans has increased over the past four years, hitting a 10-year high of 679 last year. Loan-to-value ratios for purchase loans have averaged between 95% and 96% for over 10 years.
But thanks to rising home prices and mortgage rates, FHA borrowers’ debt-to-income ratio has risen from less than 40% during the 2005-2006 housing bubble to more than 45% over the past three years.
Increase in debt-to-income ratios for borrowers
The percentage of loans with all three risk tiers is now more than triple what it was 12 years ago, rising from 2.6% in 2013 to 8.4% in 2025, according to the FHA.
Loans with all three risk tiers “require additional scrutiny and monitoring due to higher costs to the MMI fund,” the report said.
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