By the Numbers
Risk, reward in FHA credit trends for Ginnie Mae MBS
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. This material does not constitute research.
Performance in both premium and discount Ginnie Mae MBS may feel the impact of credit trends in loans insured by the Federal Housing Administration. FHA loans continue to transition into delinquency at an increasing rate, raising the risk of buyouts in premium Ginnie Mae MBS. In discount MBS, indications that a rising share of delinquent loans are re-defaulting raises the possibility that some will have to sell their home or face foreclosure. That increase in prepayments would benefit discount MBS pools.
The risk to premium pools
More FHA loans are becoming at least 60-days delinquent each month than at any time since the Covid-19 pandemic (Exhibit 1). Other than a seasonal decline early in the year, which happens after borrowers receive tax refunds, the transition rate to at least 60 days delinquent has been higher than the spike caused by Hurricane Maria in 2017. Close to 1.5% of FHA borrowers are missing their second mortgage payment each month. This transition rate has been steadily climbing since early 2021. The VA transition rate is much lower than the FHA transition rate, but also edged higher in 2024 after holding relatively steady over 2022 and 2023.
Exhibit 1. The transition rate into delinquency is at post-Covid highs.
The data for May and June 2020 is not plotted to avoid compressing the y-axis scale since transition rates were extremely high at the start of Covid. The values are printed in the in-set box.
Source: Ginnie Mae, Santander US Capital Markets.
Hurricane Milton is increasing delinquencies in Florida
Hurricane Milton will also likely push delinquencies higher in Florida (Exhibit 2). This table shows the percent of loans that became at least 30-days delinquent in October. The transition rate in Florida jumped 73 bp to 2.64%, while the transition rates in other states fell 21 bp to 1.62%. Both FHA and VA delinquencies are being pushed higher by the hurricane. The table also shows North Carolina, portions of which were devastated in late September by Hurricane Helene. However, it does not appear that Helene is having an appreciable effect on delinquencies in North Carolina. A 60-day threshold is typically a better measure of loans that are truly in distress, but the timing of the two hurricanes makes it necessary to use a 30-day threshold. Past experience suggests many of these loans will cure, but loans in premium MBS will be at risk of an early buyout by the servicer.
Exhibit 2. The pace of new defaults accelerated in Florida in October.
The percent of loans that become at least 30-days delinquent in the month.
Source: Ginnie Mae, Santander US Capital Markets.
The opportunity for discount pools
Throughout 2022 and 2023 the share of delinquent loans in pools held steady, despite the growing transition rate into delinquency (Exhibit 3). That suggests efforts to cure borrowers’ delinquencies were successful—the pace of cures offset the pace of new delinquencies. However, the delinquency rate has climbed higher in 2024, despite introducing an improved loss mitigation program that lowers the borrower’s monthly payment in addition to bringing a loan current. This suggests that some of the new delinquencies cannot be cured, that borrowers are re-defaulting, or both. Roughly 5% of FHA loans in Ginnie Mae pools are at least 60 days delinquent.
Exhibit 3. The number of delinquent loans in pools increased this year.
Source: Ginnie Mae, Santander US Capital Markets.
The VA delinquency rate is also increasing. This is due to the slightly faster transition rate into delinquency and a foreclosure moratorium in place through the end of the year, allowing servicers time to implement a new loss mitigation program. That program will allow servicers to buyout delinquent loans and be reimbursed by the VA, which will hold the loan in its portfolio instead of re-securitizing the loan.
The highest delinquencies are generally in various cohorts originated in 2021 and 2022 (Exhibit 4). The 3.5%s 2021, for example, are 10.5% delinquent. And the 6.5%s 2022 are 10.6% delinquent. Various other cohorts have over 5% of loans at least 60-days delinquent. If servicers are unable to cure those delinquencies, then the borrower will eventually have to sell the home or be foreclosed, causing a prepayment either way. Loans in MBS priced above par are also at risk of early buyouts.
Exhibit 4. G2SF 60+ day delinquency rates by coupon and vintage.
Source: Ginnie Mae, Santander US Capital Markets.
The FHA’s “partial claim” loss mitigation program
Loans that are cured typically receive a subordinate lien, known as a partial claim, funded by the FHA. The proceeds are used to bring the first lien current and, in a new program introduced this year, can also be used to lower the borrower’s monthly payment. The subordinate lien only needs to be paid back if the borrower moves, the loan matures, or if the borrower refinances into a non-FHA loan. This tends to slow housing turnover but not deter refinancing, hurting discount MBS.
In many FHA cohorts 10% to 15% of borrowers have received partial claims (Exhibit 5). For example, 15.2% of the loans in the 3.5%s 2021 cohort have partial claims. This is likely contributing to slower housing turnover in these cohorts relative to similar VA loans. However, FHA turnover is typically faster than conventional, despite the partial claims. And the rising delinquency rates noted early suggest that some of these borrowers may be re-defaulting, and those borrowers may be more likely to prepay.
Exhibit 5. In many cohorts 10% to 15% of FHA borrowers have received partial claims.
The table those the % of loans (by balance) in each cohort that has at least one partial claim.
Source: Ginnie Mae, Santander US Capital Markets.
Borrowers can receive more than one partial claim, although the total amount is capped at 25% of the unpaid balance at the time of the first partial claim. A servicer may determine that a borrower that re-defaults cannot be cured by an extra partial claim, and the servicer may not be able to offer one because the borrower is at the cap. Eventually some of these loans are likely to pay off because the borrower is forced to move or is foreclosed on.
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