By the Numbers

FHA loans show a small increase in new defaults

Brian Landy, CFA | November 12, 2021

This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.

The number of delinquent loans in Ginnie Mae MBS pools fell in October, but the pace of decline is slowing. Servicers are buying out fewer delinquent loans, and there has been a small increase in the number of new FHA and Rural Housing Service defaults. Both programs added more seriously delinquent loans in October than in any month in 2019, and the pace has increased since bottoming out in June. This raises the prospect that delinquency rates may take a long time to recover back to 2019 levels, especially if the redefault rate proves to be higher for loans that receive loss mitigation during the pandemic. For FHA, the path of delinquencies will a key role in assessing the solvency of its insurance fund and in any decision to change mortgage insurance premiums.

All three major government insurers have shown a steady decline in MBS delinquency rates this year (Exhibit 1). The FHA’s serious delinquency rate, defined as loans at least 90 days delinquent, peaked the highest during the pandemic. It has fallen to 3.26% at the start of November. The second highest delinquency rate came from the USDA’s Rural Housing Service, although it peaked later than the FHA’s numbers. It has recovered more slowly, likely because the USDA’s loss mitigation program has relied more heavily on loan modifications. The VA had the lowest peak delinquencies throughout the pandemic. The small Public Indian Housing program peaked at similar levels as the VA but has not improved as much since peaking.

Exhibit 1. The share of ≥90-day delinquent loans in Ginnie Mae pools

Source: Ginnie Mae, eMBS, Amherst Pierpont Securities

The aggregate delinquency rate depends on how quickly servicers buyout delinquent loans, how many loans cure, and how many loans become delinquent (Exhibit 2). This shows the percentage of Ginnie Mae loans that transition into or out of serious delinquency each month. Loans can exit delinquency by curing or buyout (prepay); these are shown in the left-hand blue bar each month. Loans can also transition into delinquency, which is shown in the right-hand red bar. These are further broken down into “New DQs”—loans that have never been at least 90 days delinquent—and redefaults. The latter includes loans that were re-pooled as modified loans or in reperforming RG pools. If the two bars are of equal height then the delinquency rate would not change that month. Data for 2019 is also included to provide a reference for pre-pandemic levels.

Exhibit 2. FHA new defaults have increased since the low in June

Source: Ginnie Mae, eMBS, Amherst Pierpont Securities

FHA buyouts peaked in April and have fallen nearly every month since. The number of loans curing without buyout also peaked earlier in the year. These numbers should trend lower over time since the number of delinquent loans remaining in pools was shrinking. Meanwhile the pace of new delinquencies was highest to start the year and bottomed out in June. But it has rebounded slightly since then and more loans are becoming delinquent now than at any point in 2019. In October 0.30% of FHA loans became seriously delinquent, compared to 0.25% in June 2021 and 0.20% in October 2012. It does not appear that the increase was solely due to redefaults. Buyouts and cures are still elevated compared to 2019, when delinquency rates were lower and changed little from month-to-month.

The VA program experienced fewer defaults during the pandemic (Exhibit 3). Because of this the number of buyouts and cures is much lower than for the FHA each month. The pace of new delinquencies also remains low compared to the FHA and has returned to 2019 levels. And VA loans are not showing the same recent pickup in new delinquencies and redefaults as in the FHA program.

Exhibit 3. VA new defaults remain near 2019 levels

Source: Ginnie Mae, eMBS, Amherst Pierpont Securities

More loans are also starting to default in the Rural Housing Service program (Exhibit 4). Like the FHA, the number of loans becoming seriously delinquent bottomed out in June but has risen since. In October 0.32% of RHS loans became seriously delinquent, compared to 0.25% in June and 0.26% in October 2019. The buyout rate has fallen a little over the last few months, and the pace of cures without buyout is back to 2019 levels.

Exhibit 4. Rural Housing Service new defaults are also increasing

Source: Ginnie Mae, eMBS, Amherst Pierpont Securities

The FHA’s delinquency trends are arguably the most important of the government insurers since it contributes the most loans to Ginnie Mae pools. The FHA is responsible for more delinquent loans than just those currently in MBS pools, because many loans that were bought out have not yet been gone through loss mitigation and been re-pooled. However, the pool data is timelier than the FHA’s own reporting, which currently ends in August, and therefore may be the first place to indicate any weakening in FHA credit performance. The pickup in defaults is small so far, but there is uncertainty regarding the ultimate effectiveness of loss mitigation measures. This should factor into any decision the FHA makes about insurance premiums. The release of the FHA’s annual report, with data through September, is imminent and should give more insight into the FHA’s view.

Brian Landy, CFA
brian.landy@santander.us
1 (646) 776-7795

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