Who Originated the Most FHA Loans Currently Underwater?
An analysis of lenders with the largest percentage of underwater FHA mortgages that originated between 2022 and 2204 found that the mortgages originated by Lennar Mortgage, the mortgage arm of Lennar the homebuilder, during that period now has 27% of their loans underwater. 27% of the 28,300 loans they originated now have a balance greater than the value of the home they secure. D.R. Horton's lending arm originated 55,000 FHA loans during that period. Of those loans 18% of the borrowers are underwater. By comparison, Quicken Loans, a non-homebuilder mortgage originator has merely 10% of its FHA originated loans underwater after originating a similar volume of loans.
Why Are Builder Loans so Bad?
Big builders are offering the cheapest mortgages in the market. Bargain mortgages are helping more people get into new homes. However, there is a hidden cost to these cheap mortgaqes -- inflated housing prices. Homebuyers that take advantage of these low mortgages may soon find themselves with a house worth less than the value of the mortgage. Newly built homes are generally clustered in areas with plenty of new supply, which exacerbates the problem if values fall.
But the cheap loans are probably inflating property values. Between 2019 and 2024, prices for new homes bought from large builders, who are more likely to use buydowns, increased 6% more than both existing homes and new homes purchased from smaller builders. Buyers overpay for their homes in return for a lower monthly mortgage payment.
Is This Bad?
The financial resilience of a a subset of borrowers has been weakening as people stretch to afford a home. Last year, nearly two-thirds of FHA borrowers had a monthly mortgage payment that ate up 43% of their pretax income, which is considered quite high. Most of these FHA buyers are funding 97% of their purchase using the FHA loan.
Is this a problem?
If there is an increase in unemployment, these unemployed FHA homeowners will soon find the need to unburden themselves from a bad economic investment.. If an underwater homeowner can't make mortgage payments and is forced to sell their house, the Great Financial Recession of 2008-2009 proved that homeowners will hand over the keys and deed to the lender and let the lender take the loss. If the number of these transactions or other forced sale transactions turn into more than a trickle, home prices will naturally decline.
A decline in housing prices will only exacerbate the unemployment problem by making the mortgages even further underwater.