Mortgage delinquencies are rising. FHA borrowers are feeling the impact

After hitting a historic low point in 2023, mortgage delinquency rates have been climbing rapidly in recent quarters, particularly within the Federal Housing Administration (FHA) portfolio. The shift is being driven by a combination of factors, including macroeconomic pressures, the impact of natural disasters, and rising property insurance premiums and taxes.

Certain borrower groups are especially vulnerable, including those with lower credit scores, higher debt-to-income ratios and those who opted for more affordable loan products. Similarly, some borrowers who transitioned from COVID-19 forbearance plans into workout options are now experiencing renewed financial strain as they renegotiate terms with their servicers.

Despite the uptick, economists caution against alarm — for now. While delinquency rates have increased, they remain relatively low by historical standards. Still, further deterioration could pose challenges for some investors and servicers and will warrant close attention, according to industry experts.

Ties to unemployment

The year-over-year increase in delinquencies is reflected across multiple market metrics.

ICE Mortgage Technology reported a national delinquency rate of 3.48% in September, up from 3.29% a year earlier. Third-quarter data from the Mortgage Bankers Association (MBA) showed a 30-day delinquency rate of 3.92% for one- to four-unit residential loans, up from 3.62% in Q3 2023 and 3.37% in Q2 2023 — which was the lowest level since 1979. And TransUnion highlighted a 60-day delinquency rate of 1.22% in Q3 2024, a 27 basis-point (bps) increase from the same time last year. 

Rather than the current level, the upward trend in mortgage delinquencies is the primary cause for concern. This is due to the strong correlation between unemployment rates and home loan defaults, according to Marina Walsh, the MBA’s vice president of industry analysis.

“Oftentimes, when we look at the delinquency rate, we’re looking at the unemployment rate too, and our forecast definitely has the unemployment rate going up to 4.7% next year,” Walsh said.

“The year-over-year increase in delinquencies is certainly something worth monitoring,” Satyan Merchant, a senior vice president and mortgage business leader at TransUnion, said in a statement. “However, it’s important to note that current delinquency rates remain low in comparison to long-term measures. It remains to be seen if the aforementioned interest rate reductions and cooling inflation help stem this increase in the coming quarters.”

Meanwhile, rising homeownership costs are adding to the challenge. Dave Vida, chief revenue officer at subservicer LoanCare, speaking at an Information Management Network (IMN) servicing conference in New York in November, said that property taxes and insurance costs increased by approximately 12% across LoanCare’s portfolio last year. 

Historically, insurance and taxes represent 30% of a borrower’s total mortgage payment, but this share went up to 33% last year. Vida added that, “When that payment gets 40% of the total, there’s a direct correlation to delinquency performance.” He added that LoanCare is actively working to identify early signs that borrowers may be struggling to afford their mortgages.

Regulators are also taking notice of the issue, although solutions remain elusive as they continue to gather information. “The challenge for them is that taxes and insurance are governed by the state regulations and not by federal regulators, so there are limits to what they can do,” said Krista Cooley, a partner at Mayer Brown.

Natural disasters are also contributing to the rise in delinquencies. The physical damage and financial strain caused by recent hurricanes have affected homeowners’ abilities to meet their mortgage obligations. According to ICE, approximately 4.9 million mortgage holders, with a combined $1 trillion in unpaid principal balances, were in the path of hurricanes Helene and Milton. Among them, 2,500 borrowers became delinquent following the storms in September and October.

Additionally, Hurricane Beryl has impacted around 1.2 million mortgage holders, with 13,000 already struggling to keep up with their payments, ICE reported.

Where is the risk?

Signs of financial stress are concentrated in specific portfolios. Walsh said that there’s a “big question mark” related to FHA loans, which recorded a 10.46% delinquency rate in Q3 2024, up from 9.5% in the same period last year. This represents a 96-bps increase, outpacing the 82-bps rise among U.S. Department of Veterans Affairs (VA) loans and the 30-bps uptick for conventional mortgages.

Exclusive data shared by the MBA with HousingWire revealed the long-term spread between FHA and conventional loan delinquency rates. Since 2014, the average gap has been 620 basis points, but it has now widened to 783 bps. The spread peaked at 1,010 basis points in Q1 2021 and shrank to 405 bps in Q1 2017.

“This tells us that in case of any type of event, whether it’s hurricane- or storm-related, or related to the economy, it will be felt more by FHA borrowers versus the others,” Walsh said.  

The relative resilience of VA loans may be linked to policy interventions, Walsh explained. Specifically, the development of a loss-mitigation waterfall encouraged servicers to prevent these loans from entering foreclosure. “It could be policy-related,” she added.

Another group raising concerns are borrowers exiting COVID-19 forbearance plans. According to the MBA, since March 2020, servicers have provided forbearance to nearly 8.4 million borrowers. As of October 2024, 235,000 remained in forbearance plans, with an increase of 65,000 in October — the largest monthly gain since May 2020. Among the new additions, the MBA attributes 45% to natural disasters and 55% to temporary hardships such as job loss, death, divorce or disability.

Importantly, in October, the share of loans with completed workouts stood at 68.47%, a decline of 29 basis points from the previous month and down 384 bps from a year earlier.

Larry Goldstone, president of capital markets and lending at BSI Financial Services, has particular concerns about how FHA and VA loans are being managed as they transition from pandemic-related forbearance plans to workouts. At the IMN servicing conference in New York last month, Goldstone said there are now “COVID default loans.”

“The incidence of re-default rates on modified loans is not insignificant — it’s running probably 50%, which means half of these borrowers can’t afford the home they live in,” Goldstone said. “They are just going to need more and more government assistance, and that’s going to run out at some point in time.”

According to Goldstone, governments “are already offering 30% off of your mortgage balance as a free government relief,” which in his opinion is a “pretty generous program.”

Christopher Sabbe, senior vice president of enterprise sales at PHH Mortgage, said that investors appear “complacent” about current delinquency levels because the financial strain hasn’t reached the critical levels seen during the Great Recession.

“I had a client just last week who said, ‘I’ve got a 9% delinquent book, and I think that’s fine,’” Sabbe said during the IMN conference. “I responded, ‘It’s 9% today. What will it be a year from now?’”

While some investors may not yet feel the pressure, others are beginning to proactively address the situation by transferring either their entire portfolios or segments — such as loans delinquent by 30, 45 or 60 days — to specialized servicing companies.

“We are all not the best at everything — pick a specialist and take those assets that can really be worked and get that borrower re-performing,” Sabbe said. “If you can reduce delinquency by 20% — say you’re a 5% book and you go to a 4% book, that on a 10,000-loan book, call it $2 billion — you’re going to save $600,000 to $1 million.”