This article raises the ghost of the 2008 Great Financial Crisis.

wsj.com - Mat ishbia uwm mortgages fannie mae freddie mac


UWM Is a Government Mortgage Canary
The struggling lender has used FHA taxpayer guarantees to make risky mortgage bets.

By The Editorial Board, The Wall Street Journal, Aug. 13, 2026

...
After the housing meltdown, big banks pulled back from the mortgage market as the government required them to hold more capital. Non-banks filled the gap, though they don’t have to abide rigorous capital, liquidity and stress tests like banks. They can also game financial regulations with interest-rate hedges...

Non-banks originate the vast majority of loans backed by the Federal Housing Administration (FHA) and the two giant government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac. These loans are pooled and sold to private investors with government guarantees. This lending system invites moral hazard, as non-banks make money by originating more mortgages.

But if a borrower later defaults, taxpayers are on the hook...

By late 2022, 70% of FHA borrowers had debt-to-income ratios exceeding 43%, which is generally considered risky. That’s up from 28% in 2012 and 60% before the pandemic. As inflation started to bite, defaults increased. About 15% of FHA borrowers who took out a loan between June 2021 and March 2024 fell seriously delinquent within a year. ...

Remarkably, 12 mortgage lenders have even higher one-year serious delinquency rates for recent mortgages, including Ages Mortgage (27.3%), Top Flite Financial (24.5%) and Loan United (23.7%). Most of these lenders also make loans that are guaranteed by Fannie and Freddie, so the FHA data could signal problems in loans guaranteed by the two GSEs...

Foreclosures remain low, but that’s because the FHA continues to cover missed payments for borrowers who default. [Used the FHA insurance fund to cover arrears of struggling borrowers and offered to reduce their monthly payments by up to 25% for three years. ]... [end quote]

Way back in the old days, banks loaned money for mortgages and held the loans on their own books. Since the banks were at risk they carefully scrutinized every application.

I remember when a mortgage required a 20% down payment and PITI no higher than 25% of income. That was a long time ago.

Because of rules designed to protect the banks and banking system after the 2008 financial crisis, most mortgages aren’t provided by regulated banks anymore.

Shadow banks aren’t regulated. They can originate mortgages and sell them to the GSEs (Fannie Mae, Freddie Mac and the FHA) as well as packaging them into derivatives which are sold on the secondary market. They can also make risky bets like interest rate hedges.

There was pushback against establishing the GSEs from the start because the risk of default was transferred to the taxpayer. The mortgage originator makes money when the mortgage is written but the taxpayer bears the risk.

FHA loan: Minimum credit score is 500 with a 10% down payment, or 580 for a 3.5% down payment. Requires an upfront premium (1.75% of the loan) plus a monthly fee that usually lasts for the entire life of the loan.

Conventional loan: Minimum credit score is generally 620, with down payments starting at 3% for first-time buyers. No upfront insurance fee. Monthly private mortgage insurance (PMI) is only needed if you put down less than 20%, and it cancels automatically once you reach 22% home equity.

Borrowers who took out loans between 2021 and 2024 bought near peak prices with higher interest rates and elevated inflation. High Debt-To-Income ratios mean these households have virtually no financial buffer for unexpected income shocks, medical expenses, or job loss. Meanwhile, insurance and property taxes are rising fast so even if they could cover their PITI at first the squeeze gets tighter and tighter.

There has been considerable discussion on METAR about how there could be a recession when profits are high, the stock market is booming and the economy is growing (though the 2Q26 was only 1.3% real GDP growth).

The bottom 50% of the population owns only 2% of the assets. While many are renters, many own homes which may be their largest (or only) major asset. A mortgage may be a real burden on a family since a mortgaged home doesn’t have the flexibility to move the way a renter can.

The unemployment rate usually starts to rise before economic growth slows enough to declare a recession (always in retrospect).

St. Louis Fed (FRED): Unemployment Rate (UNRATE) | FRED

Unemployment isn’t rising now due to many retirements and immigrants leaving the country. But we will follow this closely.

Household financial distress almost always leads the labor market, not the other way around. Delinquencies in unsecured credit (credit cards, auto loans) rise first, followed by FHA/low-equity mortgages. In a classical recession, consumers spend less so corporate income falls. The company lays off workers because they aren’t selling as much. And then rising unemployment hits.

Delinquent mortgages are already shockingly high. This number will rise in the event of a recession. The banking system won’t be threatened as it was in 2008. But taxpayers are carrying the moral hazard of shadow banks that are issuing weak mortgages. Massive defaults could increase the federal deficit. Investors would demand a higher spread between mortgage bonds and Treasuries, keeping mortgage rates high.

This situation won’t cause a sudden financial crisis like 2008. But the pressure on the economy would cause the Federal Reserve to cut the fed funds rate. At the same time, the increased federal deficit would keep longer-duration bond yields high.

Wendy