Premier Member Editorial: Why Mortgage Servicers Should Prepare Now for Rising Defaults

By Andrea Meir, Director of Hardship Technology Suite, ICE Mortgage Technology

Mortgage defaults remain below pre-pandemic levels, but they’ve been edging up, especially among financially vulnerable homeowners. According to the September 2025 ICE Mortgage Monitor, foreclosure starts are up more than 7.6% year-over-year, and loans in active foreclosure have increased by 19,000 compared to last year.

Several factors are converging to create this trend. Inflation has eroded purchasing power, rising property insurance and taxes are increasing mortgage-related expenses, and federal student loan repayments have resumed. Meanwhile, interest rates remain elevated, with FHA 30‑year fixed mortgage rates more than double 2020 levels.

FHA Loans: An Early Indicator of Strain

FHA-backed loans, which traditionally serve borrowers with lower credit scores and smaller down payments, are showing the earliest signs of stress. According to ICE McDash loan-level data, serious delinquency rates for FHA loans have climbed to 3.01%, up from 2.47% a year ago. The rise is gradual but persistent, and it’s a clear signal that servicers should prepare.

Key Changes in FHA Loss Mitigation Guidelines

Compounding the issue, the federal government recently ended COVID-19 recovery programs and introduced new FHA loss mitigation guidelines that went into effect on Oct. 1 with additional provisions to Mortgagee Letter 2025-12 that will go into effect Dec. 30. These new guidelines include a 24-month limit on permanent home retention loss mitigation options, an updated loss mitigation waterfall and elimination of language accessibility notices. These changes will reshape how servicers handle defaults and could lead to significant compliance issues if not managed proactively.

Servicers Should Act Now – Not Later

Based on experience, mortgage servicers are aware that a combination of high interest rates and economic pressures for borrowers can create an influx of default volume. Servicers must continually review and align their loss mitigation processes and servicing technology to support:

• Early identification: Spotting distressed borrowers before they miss multiple payments is key. This requires portfolio surveillance that uses advanced analytics to sift through vast servicing datasets to detect subtle signs of financial strain.
• Regulatory alignment: Servicers should be prepared for increased requests for loss mitigation from borrowers seeking to avoid foreclosure and bankruptcy.  With the substantial and complex changes made to FHA’s loss mitigation policy, servicers should use technology that automates the loss mitigation decision and fulfillment processes to expedite solutions for borrowers.
• Portfolio protection: By intervening early, servicers can offer tailored solutions such as loan modifications, repayment plans or equity-tapping options to help borrowers stay in their homes and reduce the risk of foreclosure.

Technology Is the Game-Changer

Modern mortgage servicing platforms are no longer just record-keeping systems – they’re predictive and solution engines. The latest technology allows servicers to:

• See deep into their portfolios: Advanced analytics can flag borrowers who are trending toward default based on payment behavior, credit utilization and external economic indicators.
• Combine portfolio data with external data resources: Servicers can overlay their internal data with external sources–such as FEMA disaster zones, unemployment spikes and regional layoff trends–to pinpoint geographic areas at heightened risk.
• Use default scores: Some platforms offer a default score feature that quantifies a borrower’s risk level, helping servicers prioritize outreach.
• Offer borrowers self-service options: Through in-platform features and messaging, servicers can show borrowers what assistance programs they may be eligible for and, in some cases, fulfill that loss mitigation assistance.

Proactive Outreach Is Essential

Once high-risk borrowers are identified, the next step is engagement. Many distressed homeowners avoid contact with their servicers out of embarrassment or fear. By automating proactive outreach, servicers can break the silence by demonstrating they are here to help, with proposed program assistance.

Personalized solutions are critical in helping borrowers navigate financial hardship and avoid foreclosure. Servicers have a range of tools at their disposal, including forbearance and repayment plans designed to ease short-term financial burdens and modifications that address long-term hardships. In some cases, borrowers may be able to tap into their home equity to bridge temporary gaps.

The most advanced servicing platforms support these efforts by offering a waterfall of options–an intelligent, step-by-step framework that guides borrowers through a tailored decision tree based on their unique circumstances. This approach not only improves resolution rates but also fosters trust and transparency between servicers and homeowners, creating a more collaborative and compassionate path forward.

Bankruptcy Is the Wild Card

Bankruptcy remains the wild card in the default equation. For mortgage servicers, staying ahead of bankruptcy filings is not just about compliance; it’s about protecting their portfolios from costly missteps, as well as helping borrowers receive fair, timely assistance. Bankruptcy regulations and mandated timelines can be detailed and complicated, meaning servicers must be equipped to navigate a complex landscape.

The latest mortgage servicing technology includes powerful tools to streamline bankruptcy management from start to finish. These capabilities can automate the tracking of pre-petition and post-petition details, flag critical deadlines and support relevant bankruptcy regulations. By integrating loan updates directly into the servicing system, servicers can avoid missed filings, incorrect payment applications and other errors that could result in legal and financial exposure or borrower harm.

The Time to Prepare Is Now

Several indicators–higher inflation, resumed student loan payments, elevated interest rates and a gradual rise in FHA delinquencies–suggest that default risks may be edging higher. With updated government guidelines aimed at reducing loss mitigation churn, it’s a good time for servicers to review their approach. Thoughtful investments in servicing technology can help borrowers remain in their homes, strengthen compliance with evolving regulations and reduce avoidable losses.

Preparation matters, and early steps can make a meaningful difference. Now is a sensible moment to ensure borrowers have access to the resources and support they need.

(Views expressed in this article do not necessarily reflect policies of the Mortgage Bankers Association, nor do they connote an MBA endorsement of a specific company, product or service. MBA NewsLink welcomes submissions from member firms. Inquiries can be sent to Editor Michael Tucker or Editorial Manager Anneliese Mahoney.)