The Edge of the (FHA) Waterfall

It was the door sign that said “speak friend and enter” that finally broke me. Even now something similar hangs, burned in bright rosewood, by the front door in my mudroom. I’ve looked at a lot of foreclosed homes over the last decade. You’d be surprised how often they come to us after an auction still full of a lifetime of belongings. It’s never easy. Foreclosure destroys dreams – and you always get a sense of that. It’s an unfortunate part of the job. But this time it was just too close to home. A simple reminder that In other circumstances it could be me. 

That was back in 2019. At that time our office was bidding on fifty plus foreclosed homes each week. Thousands each year. It was obviously heartbreaking seeing so many, even if it was good for our business. One thing that I learned early in my career was not to judge those who’d lost their homes to foreclosure. And it’s worth saying that in the years that have followed, and through the experience of buying and owning my own property, nothing has yet challenged that belief. 

Everything changed in 2020. The COVID-19 pandemic and the accompanying period of market uncertainty triggered one of the greatest upticks of unemployment in US history. Within weeks, millions had been furloughed or laid off. With the 2008 collapse still fresh on the mind, the Federal Housing Administration took steps to prevent a potential onslaught of foreclosures, creating a loss mitigation waterfall for FHA borrowers that is still in place today, five years later. 

While only one of many measures enacted to soften the burden on homeowners, this waterfall plan has clearly been effective at aiding the stopping of foreclosures. These days our office might bid on only a dozen each week across multiple counties, a stark but welcome decline. And few if any of these homes are FHA foreclosures.  Yet there’s trouble brewing on the horizon, as the Federal Housing Administration has announced the definitive end of the relaxed COVID-19 era loss mitigation waterfall administered in FHA’s Single Family Housing Program. 

According to the Mortgage Bankers Association Fourth Quarter of 2024 National Delinquency Survey, the FHA delinquency rate increased to 11.03 percent at the end of last year. Many of these delinquent accounts likely have some form of relaxed mitigation helping them avoid a foreclosure start. 

Previously the relaxed mitigation waterfall was extended through 2026, pursuant to “ML 2025 06”, which was published in January 2025. However on April 15, 2025, the department of Housing and Urban Development published “ML 2025-12”. This 251 page document outlines new Permanent Loss Mitigation Options, while also moving up the expiration date of the COVID-19 Recovery Mitigation Options to September 30, 2025. We’re still working to better understand the provisions of this document. But one thing is for certain. With so many delinquent FHA mortgages, there’s likely to be an uptick in the number of foreclosures if protections are reduced. 

For a small, but significant number, this may mean experiencing firsthand the devastating effects of foreclosure. But to many, it could also mean an influx of homes in your market becoming available for buyers – at a steep discount. 

What that will mean for overall housing prices still remains to be seen. Despite a lot of new inventory hitting Jacksonville, the supply is still within tolerances for a balanced, if buyer-leaning market. Alot of the current stickiness comes from rate uncertainty and cash flow concerns on the part of buyers. As large down payments become more difficult to manage, and rising borrowing costs swell monthly payments, many would-be buyers, especially those that would be first-time buyers, have been sidelined. 

If rates come down and mortgages become more affordable, demand for inventory will likely spike, easily absorbing most if not all of the surplus of foreclosures. But if rates remain sticky, or continue to rise, as they’ve threatened to do since the start of April, the outlook could look a lot worse. 

Real estate is reactionary. And it lags as a result. Foreclosures usually sell below market value. Appraisers look at recent sales data as part of the processing to determine appraisal values, and while foreclosures are often weighted, a like kind foreclosure sale could hurt your appraisal. A handful can spell trouble down the line when you are trying to sell, even going so far as to hurt your appraised value. 

Then there’s the vacancy issue. During the foreclosure process, many homes end up vacant or abandoned while the courts work out the final judgements and set auction dates. Vacant homes often become unsightly and can be a magnet for squatters and bad actors. Asset managers do their best to maintain the homes, but bi-weekly or monthly maintenance does little to combat the blight that a foreclosed home can cause.

So to me, a worst case scenario looks like a huge influx of vacant and blighted foreclosed homes selling below market value, dragging the remaining retail market down with it as a result. It could even hurt buyers if banks suddenly start severely tightening lending requirements to off-set new foreclosure losses. A disaster that we’d certainly feel the impact of at the local level. 

Best case? Changing economic conditions allow buyers to return to the pool. The number of delinquencies decreases, and prices continue to rise, barely affected by the small uptick in new foreclosures. Less is wasted on preventative programs, and more can be passed on to new buyers in the form of subsidies and grants, opening the pipeline even further. There’s certainly an angle and a silver lining here, it’s just a tight target with a lot of complex variables. One I wouldn’t want to be responsible for hitting if I was in the FHA’s shoes. 

All this to say, from what I’m seeing in my day to day, there’s no alarm bell ringing to abandon ship and start a fire sale just yet. There’s every possibility that conditions ease and prices continue to appreciate, bringing even more wealth equity to homeowners. Which is a great thing when illiquidity isn’t such a concern. But I wouldn’t skip out on a potentially beneficial sale in the hopes of squeaking out a few thousand more a year down the line. There’s just too much uncertainty out there on the horizon, and it’s going to take time to get any sense of clarity. Until then, we’re all just along for the ride. 

The views of this article are those of the contributing author and do not necessarily reflect the views and opinions of Duval Home Buyers as a whole. This article is intended for entertainment purposes only and should not be relied upon for financial or real estate advice. Always consult a licensed real estate professional if you have questions about selling your home. Members of Duval Home Buyers LLC are licensed in the State of Florida.