Overall delinquencies are creeping upward but the concern is primarily in one part of the market, according to the Mortgage Bankers Association's latest quarterly report.
Loans sold to the government-sponsored enterprises, which have particularly strong credit profiles, were nearly flat and close to historic lows in the fourth quarter at 2.62%. But the delinquency rate for Federal Housing Administration loans was 841 basis points higher.
FHA loans typically made to first-time buyers with more affordability challenges typically are more sensitive to performance pressure, but the particularly large spread could divide the fortunes of a servicing industry that's been a key contributor to mortgage banking profit.
"Servicing has definitely been helping over the last three years and I think it will continue to help," said Marina Walsh, vice president of industry analysis at the MBA at the group's servicing conference in Dallas. But she noted that government servicers could face some pressure.
Overall it appears larger loan sizes drove preliminary first-half figures for pretax servicing operating income to its highest point since 2008 last year at $418 per loan. That metric does not reflect swings in the market value of the financial asset or hedging.
But large loans have strained affordability for some borrowers in the FHA market.
It's a concern that will primarily affect nondepository servicers, which currently account for 65% of the overall mortgage market and an even higher share when it comes to these government loans.
If forecasts calling for a 15% rise in origination dollar volume pan out, mortgage bankers could benefit from improvement in lending next year without undue harm to servicing. That's because they would largely be insulated from prepayments given that many borrowers have low-rate loans and are unlikely to refinance.
Refinancing has been higher than anticipated given where interest rates stand and that points to other motivations coming into play, said Joel Kan, deputy chief economist. But home purchase loans still dominate the market. Originations are forecasted to rise 13% to 14% on a unit basis.
Homeowner equity outstanding totals about $35 trillion and mortgage debt outstanding has risen too, ascending to $14.2 trillion.
"What may go up may start moderating," said Walsh, referring to home equity.
Some areas are seeing price declines but positive home appreciation is on track to persist on a national basis, said Kan.
When asked about whether deregulation anticipated in Washington could lower servicing costs next year, MBA's research team said other items could still boost spending such as cybersecurity issues, natural disasters and related escrow and loss-draft costs.
Larger mortgage risks for in the coming year include tariffs that could affect the price and availability of Canadian lumber used heavily in the U.S. Also, people who do lose their jobs are out of work for lengthening periods of time.
Delinquencies typically follow the forecast for unemployment rates which are low but could creep upward this year, Walsh said.
Within the government sector, the 2022 and 2023 vintages in particular are exhibiting weaker performance because of extraordinary affordability challenges during the period. That's also generally driven credit scores lower with a brief uptick in 2024, possibly due to overlays.
