Rising Mortgage Delinquencies: FHA Borrowers Face the Hard Truth!
After reaching an all-time low in 2023, mortgage delinquency rates are on the rise, particularly among Federal Housing Administration (FHA) borrowers. This shift is fueled by a mix of macroeconomic pressures, the aftermath of natural disasters, and soaring property insurance premiums and taxes.
Certain borrower groups are feeling the pinch more than others, especially those with lower credit scores, higher debt-to-income ratios, and those who chose more budget-friendly loan products. Additionally, borrowers who transitioned out of COVID-19 forbearance plans are now grappling with renewed financial challenges as they negotiate new terms with their servicers.
While the uptick in delinquencies is alarming, experts advise caution. Although rates have risen, they remain low compared to historical averages. Nevertheless, a continued decline could spell trouble for investors and servicers, making it an issue worth monitoring closely.
Linking Delinquency to Unemployment
The jump in delinquencies is evident across various market indicators.
ICE Mortgage Technology reported a national delinquency rate of 3.48% in September, a noticeable rise from 3.29% the previous year. The third-quarter figures from the Mortgage Bankers Association (MBA) revealed a 30-day delinquency rate of 3.92% for one- to four-unit residential loans, climbing from 3.62% in Q3 2023 and 3.37% in Q2 2023 – the lowest level since 1979. Meanwhile, TransUnion recorded a 60-day delinquency rate of 1.22% in Q3 2024, a 27 basis-point increase from the previous year.
The primary concern lies not in the current delinquency rates but in their upward trend, which is closely linked to rising unemployment rates and home loan defaults. Marina Walsh, vice president of industry analysis at the MBA, noted, “When we analyze the delinquency rate, we’re also keeping a close eye on the unemployment rate, which we expect to rise to 4.7% next year.”
“The year-over-year increase in delinquencies is something to watch,” stated Satyan Merchant, senior vice president and mortgage business leader at TransUnion. “However, it’s crucial to remember that current delinquency rates are still relatively low based on long-term trends. We’re keen to see if interest rate cuts and cooling inflation can help stabilize this situation in the upcoming quarters.”
Rising homeownership costs are compounding the issue. Dave Vida, chief revenue officer at subservicer LoanCare, revealed that property taxes and insurance costs surged by approximately 12% across LoanCare’s portfolio last year.
Traditionally, insurance and taxes account for 30% of a borrower’s total mortgage payment, but this figure jumped to 33% last year. Vida pointed out that when this share escalates to 40%, there’s a direct correlation to delinquency rates. LoanCare is now taking proactive steps to identify early signs of financial distress among borrowers.
Regulators are also paying attention, though finding solutions is tricky. “The challenge they face is that taxes and insurance are regulated at the state level, leaving federal regulators with limited options,” explained Krista Cooley, a partner at Mayer Brown.
Natural disasters are further exacerbating the delinquency dilemma. The devastating impact of hurricanes has hindered many homeowners’ abilities to stay current on their mortgages. ICE estimates that about 4.9 million mortgage holders, with a staggering $1 trillion in unpaid principal, found themselves in the path of hurricanes Helene and Milton. After these storms in September and October, 2,500 borrowers fell into delinquency.
Additionally, Hurricane Beryl has affected around 1.2 million mortgage holders, with 13,000 already struggling to meet their payment obligations, according to ICE.
Identifying the Risk
The signs of financial strain are not uniformly distributed; they are concentrated in specific borrower segments. Walsh highlighted a concerning trend regarding FHA loans, which recorded a delinquency rate of 10.46% in Q3 2024, up from 9.5% the previous year. This increase of 96 basis points outstrips the 82-basis-point rise among U.S. Department of Veterans Affairs (VA) loans and the modest 30-basis-point uptick for conventional mortgages.
Data shared exclusively with the MBA indicates a widening gap in delinquency rates between FHA and conventional loans. While the average spread has been 620 basis points since 2014, it has ballooned to 783 bps now. The spread peaked at 1,010 basis points in Q1 2021 but dipped to 405 bps in Q1 2017.
“This indicates that in any scenario, whether it’s related to natural disasters or broader economic issues, FHA borrowers will feel the impact more severely than their counterparts,” Walsh added.
The relative stability of VA loans may be attributed to proactive policy interventions, Walsh noted, particularly the development of a loss-mitigation strategy that encourages servicers to prevent these loans from entering foreclosure.
Concerns are also mounting regarding borrowers transitioning from COVID-19 forbearance plans. The MBA reports that since March 2020, servicers have extended forbearance to nearly 8.4 million borrowers. As of October 2024, 235,000 remain in forbearance, with an alarming increase of 65,000 in October alone — the largest monthly gain since May 2020. Of these new additions, 45% are attributed to natural disasters, while 55% stem from temporary hardships like job loss, death, divorce, or disability.
Crucially, in October, the completion rate for workouts stood at 68.47%, a decline of 29 basis points from the prior month and down 384 bps from a year earlier.
Larry Goldstone, president of capital markets and lending at BSI Financial Services, expressed serious concerns about how FHA and VA loans are being managed as they transition from pandemic-related forbearance plans to regular workouts. “We are now seeing ‘COVID default loans,’” Goldstone noted.
“The re-default rate on modified loans is significant — it’s running around 50%, meaning half of these borrowers can’t afford their homes,” Goldstone emphasized. “They will require ongoing government assistance, which may not be sustainable in the long run.”
According to Goldstone, the government is already offering substantial relief, such as a 30% reduction on the mortgage balance, which he considers a generous lifeline.
Christopher Sabbe, senior vice president of enterprise sales at PHH Mortgage, observed that some investors appear “complacent” about current delinquency rates, as the financial strain hasn’t yet reached the alarmingly high levels witnessed during the Great Recession.
“Just last week, a client mentioned, ‘I have a 9% delinquent book, and I think that’s manageable,’” Sabbe recounted. “I replied, ‘That’s 9% today. What will it look like a year from now?’”
While some investors may be in denial about the pressures ahead, others are proactively transferring segments of their portfolios—like loans that are 30, 45, or 60 days delinquent—to specialized servicing companies.
“Not everyone excels at everything—partner with a specialist to handle those assets effectively and help borrowers get back on track,” Sabbe advised. “Reducing delinquency by even 20% can yield significant savings—imagine shifting from a 5% delinquent book to 4% on a $2 billion portfolio, saving anywhere from $600,000 to $1 million.”
