As America heads into a deep recession, the $11 trillion residential-mortgage market is in crisis. Investors who buy home loans packaged into bonds are dumping even those with federal backing because of panic that millions might not make their payments.

Yet one risky sector had started to show cracks long before the coronavirus pandemic sparked the worst financial meltdown in 12 years: the federal government’s largest affordable-housing program, whose lenient terms are geared toward marginal borrowers.

As real estate prices soared in recent years, working-class adults everywhere have increasingly relied on mortgages backed by the Federal Housing Administration — and U.S. taxpayers. Since 2007, the FHA’s portfolio has tripled in value to more than $1.2 trillion, almost 11% of the market. While private lenders make these loans, they are packaged into Ginnie Mae bonds, common in mutual funds and pensions.

FHA borrowers are likely to struggle even more than other homeowners. Before Covid-19 started roiling China, a November FHA report found that 27% of borrowers last year spent more than half their incomes on debt, a level it describes as “unprecedented.”  The share of FHA loans souring in their first six months has doubled over the last three years to almost 1%. Borrowers’ credit scores are growing weaker.

Dave Stevens, FHA commissioner under President Barack Obama and former chief executive officer of the Mortgage Bankers Association, said a recession will expose hidden risks in home lending. “This should be an alarm bell to policy makers,” Stevens said. “Sometimes you get blinded by a good economy and suddenly look at it and see a bubble of defaults coming.”

With its military bases, universities and the headquarters of companies such as insurer USAA, San Antonio is packed with blue-collar workers who have stretched further than most to buy a place to live.

Not long ago, Alex Castillo drove his shiny black Infiniti SUV through an office park north of the San Antonio airport, along a busy seven-mile stretch of highway that loan officers call “Mortgage Row” because of its abundance of small independent mortgage companies that dominate FHA lending.

Castillo, who has the words “The Dream Starts Here” stitched into his jacket, works for Pennsylvania-based American Residential Lending. Oddly, amid the pandemic, his business is booming. His customers locked in FHA mortgages after interest rates plunged this month -- adding to federally backed mortgage debt.

“If the government tells me you’re good enough to get a loan, I have to trust and believe in the government,” Castillo said. “Then we just hope and pray that the client doesn’t get foreclosed on.”

In downtown San Antonio, scores of investors, some wearing cowboy boots and straw hats, stood on a parched lawn beside the city’s historic granite-and-red-sandstone courthouse. It was the first Tuesday of February, the day of the foreclosure auction.

First « 1 2 3 » Next