By the Numbers
The drivers behind FHA credit performance
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.
Mortgage delinquency rates have climbed in recent months, led by loans insured by the Federal Housing Administration. FHA loans require small down payments, appealing to borrowers with limited cash. These borrowers are more susceptible to factors that increase expenses such as inflation, higher insurance premiums and higher property taxes. Credit score and spread-at-origination are strong predictors of future credit performance. Attributes like state and loan size are important to investors, since they are used to form commonly traded Ginnie Mae specified pools. States like Florida currently have very high delinquency rates, while smaller balance loans are underperforming in recent production but outperforming in the 2021 and 2022 vintages.
Credit score has been a strong predictor of credit performance in this environment (Exhibit 1). Borrowers with credit scores below 650 have delinquency rates more than 10 times higher than borrowers with the highest credit scores. The chart shows the percentage of FHA loans at least 60-days delinquent for five vintages as of March. High delinquency rates raise the risk of buyouts, which lower the value of mortgage-backed securities. Low FICO specified pools are not typically traded in Ginnie Mae MBS, and the high buyout risk may be a reason for that.
Exhibit 1. Original credit score.
FHA loans as of 3/1/2025. Modified loans are excluded.
Source: Ginnie Mae, Santander US Capital Markets.
Spread-at-origination (SATO) is also highly correlated with delinquency rates (Exhibit 2). This compares the rate on a loan to the average rate of an FHA loan originated at the same time. A positive spread typically indicates the lender applied credit overlays on that loan, since the FHA does not use risk-based pricing. Negative spreads typically represent borrowers that paid points to lower their mortgage rate, but this is uncommon among FHA borrowers. It is possible that the correlation between SATO and delinquencies is fully explains by credit score and other factors.
Exhibit 2. Spread at origination.
FHA loans as of 3/1/2025. Modified loans are excluded.
Source: Ginnie Mae, Santander US Capital Markets.
Delinquency rates vary significantly across states (Exhibit 3). Florida, for example, has the fifth highest delinquency rate at 6.8%. Many specified pools are backed by only loans from Florida, so are facing greater risk of delinquent loan buyouts. In general delinquencies are higher in eastern states, especially the Southeast, and lower in western states. Washington, DC, has the highest delinquency rate at 9.6% but is difficult to spot on the map.
Exhibit 3. State.
FHA loans as of 3/1/2025. Modified loans are excluded.
Source: Ginnie Mae, Santander US Capital Markets.
Loan size, the most common attribute used to form specified pools, is not as strongly correlated with delinquencies (Exhibit 4). In the 2024 vintage, delinquencies are ramping up faster in smaller balance loans. However, in the 2023 vintage delinquency rates are similar across loan sizes. And in the 2022 vintage the smaller loans are the best performers. It’s possible that some borrowers with small loans tend to default quickly, and performance improves after those delinquencies are resolved or removed.
Exhibit 4. Loan size.
FHA loans as of 3/1/2025. Modified loans are excluded.
Source: Ginnie Mae, Santander US Capital Markets.
Loans with lower loan-to-value ratios are typically less delinquent than borrowers with higher LTVs (Exhibit 5). Borrowers typically prioritize mortgage payments when the home has a lot of equity. The effect is most pronounced in the 2022 vintage, but less obvious in others. LTV is less revealing for FHA loans since most borrowers make the minimum 3.5% down payment when buying a home.
Exhibit 5. Current LTV (mark-to-market with Case Shiller).
FHA loans as of 3/1/2025. Modified loans are excluded.
Source: Ginnie Mae, Santander US Capital Markets.
Rate/Term refinances tend to have the lowest delinquency rates, followed by cash-out refinances and then purchase loans (Exhibit 6). Borrowers that refinance have typically demonstrated some ability to make payments, while there is more uncertainty for purchase borrowers. People that have had prior difficulty and were ether cured and re-pooled in an RG pool or received a loan modification exhibit much higher delinquency rates. Between 35% and 40% of borrowers that received loan modifications in 2023 and 2024 have missed at least 2 payments.
Exhibit 6. Loan purpose.
FHA loans as of 3/1/2025.
Source: Ginnie Mae, Santander US Capital Markets.
Borrowers that previously became at least 60-days delinquent and cured back to current have higher delinquency rates than borrowers that had no prior defaults (Exhibit 7). This includes loans in standard pools and RG pools but excludes loan modifications. In the 2022 vintage, for example, over 25% of borrowers with one prior delinquency that was cured have re-defaulted.
Exhibit 7. Number of times the loans previously cured.
FHA loans as of 3/1/2025. Modified loans are excluded.
Source: Ginnie Mae, Santander US Capital Markets.
First-time home buyers are performing comparably to repeat buyers in the 2023 and 2024 vintages but are more delinquent in older vintages (Exhibit 8). This difference is most pronounced for loans bought during the pandemic. The chart includes only purchase loans.
Exhibit 8. First time home buyer.
FHA loans as of 3/1/2025. Purchase loans only.
Source: Ginnie Mae, Santander US Capital Markets.
Borrowers that receive cash gifts to help make the down payments are more likely to default (Exhibit 9). This is true across all five vintages. Down-payment assistance (DPA) loans can have delinquency rates over three-time higher than non-DPA loans.
Exhibit 9. Down payment assistance.
FHA loans as of 3/1/2025. Modified loans are excluded.
Source: Ginnie Mae, Santander US Capital Markets.
Borrowers that receive temporary rate buydowns are less likely to miss payments (Exhibit 10).
Exhibit 10. Temporary rate buydown.
FHA loans as of 3/1/2025. Modified loans are excluded.
Source: Ginnie Mae, Santander US Capital Markets.
Loans taken by an individual borrower tend to have higher delinquency rates than those that have multiple borrowers (Exhibit 11).
Exhibit 11. Number of borrowers.
FHA loans as of 3/1/2025. Modified loans are excluded.
Source: Ginnie Mae, Santander US Capital Markets.
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