The Great Recession of 2008 resulted in mortgage delinquencies peaking at around 10% in 2010. This caused great angst among mortgage stakeholders. In addition to the large write-downs incurred by investors in the loans themselves, mortgage servicers incurred many negative consequences as well:

• Principal and interest advances
• Taxes and insurance advances
• Increased delinquency costs
• An increase in non-reimbursed foreclosure costs
• Delayed service fees
• A diversion of management attention to this issue
• Increased staffing needs

As a low-profit-margin, high transaction volume business, these are all material drivers of servicing profitability. Additionally, while servicing current loans is a highly automated process, managing a rise in delinquencies usually requires an increase in staff. Staffing up in response to the 2010 increase in delinquencies was severely constrained by the fact that all servicers were trying to add staff at the same time, and, as a result, there was a lack of trained staff available.

Wayne Gretzky said that his success was due to his focus on where the puck was going to be, rather than where it was. Like Wayne, we should be focusing on where delinquencies are going to be, rather than where they are today.

Current delinquencies remain relatively stable, but there are some signs that this may not continue: unemployment is inching up, real estate values are static or dropping, consumer confidence is at its lowest level since 2020, GDP contracted in the first quarter of 2025, the impact of tariffs on inflation has not yet been felt, not to mention rampant geo-political turbulence. While a significant increase in delinquencies is not expected in the near term, it is certainly prudent to consider that possibility.

The Level1Analytics Delinquency Migration model is the result of the analysis of delinquency trends on millions of loans over the years. We have found that the major predictive variables of future delinquencies include: adjusted LTV (i.e., based on current real estate values), FICO, occupancy type, payment history, among others. Interestingly, FICO seems to become irrelevant once adjusted LTV exceeds 115%.

Another idiosyncrasy in mortgagor behavior relates to high versus low FICO scores. As can be seen in the charts above, low FICO score borrowers have, as expected, a higher probability of becoming one or two months delinquent than their higher FICO counterparts. However, once a high FICO loan becomes 2 months delinquent, it is far more probable to go into default than a lower FICO loan.

Understanding where delinquencies are headed, rather than simply where they’ve been, is essential to managing portfolio risk in a shifting economic environment. With the right modeling and data, you can move from reactive to proactive. Let Level1Analytics perform a custom delinquency migration study on your portfolio and uncover the insights you need to prepare with confidence. Contact us today to get started, because in credit risk, knowing is everything.