Unlocking the Secrets: The Subtle Nuances of Mortgage Performance Decline
Mortgage suspensions and arrears are hitting notable highs, signaling a complex landscape for homeowners across the country. A fresh working paper uncovers that while these two indicators seem aligned, they are, in fact, driven by different factors.
According to the Mortgage Bankers Association, forbearance has surged for the sixth straight month, now standing at 0.5%. Meanwhile, Freddie Mac’s latest report reveals a similar spike in delinquencies, which have climbed to a year-high of 0.56%. These trends contribute to a growing list of historically robust loan performance indicators showing a gradual decline.
However, a recent study from the Federal Housing Finance Agency reveals that the reasons behind delinquencies and payment suspensions are not as straightforward as they might seem. “Traditional underwriting characteristics, like credit scores or debt-to-income ratios, aren’t enough to predict who will enter forbearance,” the paper states, highlighting a more nuanced reality.
Instead, the authors argue that changes in economic circumstances, personal expectations of needing assistance, and even moral considerations about prioritizing self-interest play pivotal roles in the decision to pursue forbearance. Financial literacy and perceptions of economic uncertainty are also significant factors.
This insightful analysis by a team of economists at the FHFA is bolstered by extensive forbearance data that emerged during the pandemic. It paints a vivid picture of the struggles homeowners face today. While the MBA’s findings suggest that pandemic-related hardships are now a minor factor—accounting for just 2.8% of forbearances in November—disaster risks emerged as a critical driver, comprising nearly half of outstanding forbearances last month.
The study also explores a segment of borrowers who face credit challenges yet are not in forbearance, revealing that life-altering events such as death, divorce, or disability account for much of the remaining forbearance activity.
As the mortgage landscape continues to evolve, recent data indicates a tightening in underwriting practices, responding to the slow uptick in delinquencies reflected in Freddie Mac’s findings. The Mortgage Credit Availability Index experienced a drop in November, nearing its lowest benchmark level since April 2023.
The FHFA’s comprehensive examination utilized statistics from the National Mortgage Database, tracking ongoing performance from a representative sample of closed-end, first-lien loans. It also draws on insights from the American Survey of Mortgage Borrowers, conducted in collaboration with the Consumer Financial Protection Bureau, which delves into the impact of COVID-19 and natural disasters on mortgage borrowers.
The pandemic ushered in new approaches to support struggling borrowers, such as forbearance, many of which are likely to persist and reshape the loan performance landscape. As we look ahead, loss mitigation strategies will continue to adapt, particularly under a Republican-led administration and Congress in the coming year. This is especially pertinent for the Federal Housing Administration, which plays a critical role in assisting first-time buyers and addressing financial concerns.
In light of these challenges, associations representing mortgage bankers, depositories, and servicers have recently called for streamlined FHA loss mitigation strategies to align with proposed updates to the agency’s handbook. The goal is to facilitate smoother implementation as we head into 2026.
