If you’ve been following the news about home loans, you might have heard some worrying talk about the Federal Housing Administration (FHA). Let’s break it down in a simple way to understand what’s going on with FHA loans and why some folks think we might be heading toward another housing crisis like the one in 2008.

What’s Happening with FHA Loans?

The FHA helps people get mortgages, especially if they don’t have a lot of money for a down payment or have lower credit scores. Back in 2007, before the big housing crash, about 35% of new FHA borrowers had debt-to-income ratios—basically, how much they owe compared to how much they earn—above 43%. That’s already a stretch, but by 2020, that number jumped to 54%. Last year, in 2024, it shot up to 64%! That means a lot more people are taking on big loans they might struggle to pay back. This is a red flag because it reminds people of the risky loans that led to the 2008 housing crash, often called the subprime mortgage crisis.

Are FHA Loans Becoming Too Risky?

Here’s where it gets tricky. About 7.05% of FHA mortgages from last year went seriously delinquent—meaning borrowers missed payments by 90 days or more—within just 12 months. That’s almost the same as the 7.02% peak during the 2008 crisis, when lots of people couldn’t pay their mortgages, and house prices crashed. So, why is this happening now?

One big reason, is a program from the Biden administration. During the COVID-19 pandemic, the government started paying mortgage companies to help borrowers who miss payments. Instead of foreclosing on homes (which means taking the house back when someone can’t pay), the government lets those missed payments get added to the loan’s total amount—but without extra interest. They also cut monthly payments for some borrowers for three years, adding that reduction to the loan too.

For example, imagine someone misses five $4,000 monthly payments. That’s $20,000 added to their loan. Then, their monthly payment gets cut by $1,000 for three years, adding another $36,000 to the loan. In the end, they owe $56,000 more, but they don’t have to pay extra interest on it. If they miss payments again, the process repeats, and the mortgage companies get paid $1,750 each time they help out. The post calls this a “moral hazard,” meaning it might encourage risky behavior because there’s less risk for the lenders and borrowers.

Why Should We Care?

This situation worries people because it’s similar to what happened before 2008. Back then, banks gave out too many risky loans to people who couldn’t really afford them, and when house prices dropped, it caused a huge financial mess. Now, with the FHA insuring more risky loans and delaying foreclosures, some fear it could lead to another crash in the housing market. FHA has made nearly as many “incentive payments” to mortgage companies to prevent foreclosures as it has insured new loans. That’s a lot of money, and some worry it’s turning into a big profit opportunity for these companies, which could make the problem worse.

What’s Next?

Some say things like “Wow! Unsustainable” or “Look out below…” They’re worried about what this means for the housing market and the economy. Others point out that FHA loans were never meant to be for the riskiest borrowers, but that’s what they’re becoming.

So, should we be worried? It’s a complicated issue, but it’s clear that the FHA’s current policies are raising eyebrows. Experts and regular people alike are watching closely to see if these high debt-to-income ratios and foreclosure delays will cause problems down the road. For now, it’s a good reminder to think carefully about borrowing money for a home and to keep an eye on how the government handles these kinds of loans.