Why mortgage performance's slow deterioration has nuance

Suspensions and arrears on mainstream mortgages hit relatively high levels for the year, which suggests alignment in the two indicators, but a new working paper indicates they have two different drivers.

The Mortgage Bankers Association reported Monday afternoon that forbearance rose for the sixth consecutive month in November to 0.5%, while a separate report showed Freddie Mac delinquencies manifest a similar trend during the same period, rising to a year-high of 0.56%. 

Both of these add to the list of historically healthy loan-performance indicators showing slow, consistent deterioration, but a Federal Housing Finance Agency study released the same day points to evidence that the drivers of delinquencies and payment suspension do differ.

"Underwriting characteristics at origination, such as credit scores or debt-to-income ratios, are by themselves insufficient predictors of forbearance participation," according to the FHFA working paper.

"Instead, we argue realized changes in economic circumstances, along with subjective expectations about needing help, morality about prioritizing one's self interests, financial literacy, and perceived economic uncertainty, are central to take-up," the paper's authors added.

The findings in the paper by Justin Contat, William Doerner, Michael Seiler and Scott Weiner draw in part on the large forbearance datasets that became available due to its widespread use during the pandemic. All four are members of the FHFA's economic team.

While the MBA found pandemic hardships have diminished as a forbearance driver, accounting for only 2.8% of outstandings in November, the paper also examined 2022 data reflecting areas with high flood risk. Disaster risk drove nearly half of outstanding forbearance last month.

The FHFA economists also examined borrowers with credit hardships and no forbearance in their study.

Death, divorce or disability generally accounted for the remaining half of recent forbearance that the MBA studied.

Underwriting has been contracting in response to slow deterioration in delinquencies as reflected in Freddie Mac's data. MBA's Mortgage Credit Availability Index fell in November to a level that marked the closest its been to a benchmark level of 100 since April 2023.

The MCAI's benchmark level of 100 reflects credit conditions in 2012.

The FHFA paper examined statistics from the National Mortgage Database, which reflects origination and ongoing performance numbers from a representative sample of closed-end, first-lien loans. It also draws on data from the American Survey of Mortgage Borrowers.

The agency and the Consumer Financial Protection Bureau jointly surveyed borrowers for the ASMB between 2020 and 2024, with distribution conducted on a targeted basis to groups relevant to the analysis involved, first focusing on COVID-19 and then flood areas later.

New or more widespread methods of addressing borrowers in distress like forbearance proliferated during the pandemic, with some of this adopted for more long-term use in a manner that improved loan performance by some measures but also complicated its analysis.

Loss mitigation will continue to evolve with a Republican-dominated administration and Congress next year, particularly in the Federal Housing Administration insured market prone to first-time buyer and financial concerns.

Associations representing mortgage bankers, depositories and servicers last week called for streamlined FHA loss mit in line with a proposal to update the agency's handbook. The groups also seek an extension of the existing procedure into early 2026 to ease implementation.