The environment is relatively stable for mortgage servicers as we enter into 2025. We survived the refi conflagration of the early 2020s and are now enjoying relatively low prepay speeds.  Discount rates have increased a bit over the last several months, but there is nothing that we can’t handle. Of possible concern, however, is credit risk. While still stable in the conforming world, we are starting to see a deterioration in government loans. 

The graph shows the growth in the percentage of GNMA and FNMA loans that are one, two, and >=three months delinquent between June and December of 2024. There was little change in the Fannies but material deterioration in the GInnies.

The good news in the Ginnies is that the one-month delinquent percentage has barely changed, and the two-month delinquent rate has increased just a bit. Most of the increase came in the >= 3-month delinquent category (2.33% versus 3.16% currently). This is due primarily to the fact that this 3+ category is the catch-all category within which multi-delinquent loans reside until resolved. The nationwide average foreclosure timeline is 334 days; 425 in the 47% of states that are judicial states. Accordingly, this category will probably continue to rise soon.

The bad news is that there also appears to be some deterioration in government delinquency migration patterns. While only 1.53% of current loans in June migrated to 1 month delinquent, that migration factor has now increased to 1.61%. Likewise, whereas 20.91% of 30 days delinquent migrated to 60 days in June, that migration factor has now increased to 21.44%. Not a catastrophic increase, but one that we will be watching closely in the future. These migration factors should play a large role in your CECL loss projections.

The economy is currently doing well; although, there are certainly some storm clouds on the horizon. In addition to the potential economic risks, many mortgagors have recently taken equity out of their properties, and are facing soaring property taxes and insurance costs. Their stress level may be rising. We will be watching these delinquency levels and migration patterns closely. For market insights and commentary like this, contact us. When it comes to valuations, stop guessing, start knowing.