Why forborne loan performance keeps declining

Consumer financial health is on the wane and that likely is affecting forborne mortgage loan performance, particularly for government-guaranteed loans that are typically used for smaller loan sizes, the Mortgage Bankers Association said.

While the share of mortgages in forbearance during September increased 3 basis points from August, to 0.34% from 0.31%, the gain was driven by a 10-basis-point rise in Ginnie Mae-securitized loans entering that status.

It was the fourth consecutive month the share of mortgages in forbearance increased, noted Marina Walsh, the MBA's vice president of industry analysis.

In September, Ginnie Mae loans in forbearance made up a 0.76% share of all loans, while conforming securitized mortgages were unchanged at 0.13%. Private-label securities and portfolio loans had a 2 basis point increase to 0.37%.

"Since May 2024, Ginnie Mae loans in forbearance increased by almost 40 basis points, compared to six basis points for portfolio and PLS loans and three basis points for Fannie and Freddie loans," Walsh said in a press release.

The September data does not include the full impact from Hurricane Helene, which occurred late in the month, and of course leaves out October's Hurricane Milton.

The natural disaster share of mortgages as the reason for forbearance has been constant since July. That month the share was 26.7%, after ending May at 16.7%. This was followed by 25.9% in August and 25.8% in September, the MBA data showed.

Still the economy and the environment are having an effect on borrowers, especially those who took a government product. They are already most likely to need the relief a forbearance provides if their circumstances change. The performance for those mortgages reached a new low for the year in September.

"In addition, the share of government post-forbearance workouts that are current dropped considerably over the past four months," Walsh said. "These trends indicate that some homeowners are exhibiting signs of distress — whether because of economic hardships, natural disasters, or other reasons."

The percentage of total completed workouts since 2020 that are still current at the end of the reporting period slipped to 68.76% in September from 75.78% in May.

In August, 73% of completed workouts were still current, while in September it was almost 72%.

While that falloff is broad-based across all investor types, the largest decline is in Federal Housing Administration-insured mortgages, nearly 10 full percentage points, to 62.6% in September from 72.39% in May.