Article

Preparing your organization for increased mortgage defaults

Jan. 29, 2026 · Authored by Chuck Kronmiller

2026 Mortgage delinquency outlook

Where do delinquencies stand today?

In 2025, delinquencies trended higher for various consumer borrowings. There was an uptick in delinquencies in student loans, automobile loans, credit cards and mortgages in certain geographical areas. While elevated from post-pandemic lows, mortgage delinquencies are relatively unchanged, with a slight increase from the prior year. According to the Mortgage Bankers Association third quarter survey, the delinquency rate on one-to-four-unit residential properties increased to a seasonally adjusted 3.99%. Year-over-year, FHA loan delinquency increased, while VA loan delinquency slightly decreased, and conventional loan delinquency was relatively flat.

While earlier stage delinquency maintained levels with only nominal increases during the third quarter, the number of mortgages that were deemed seriously delinquent increased. Serious delinquency consists of mortgages that are 90 or more days delinquent or in foreclosure. In 2025, there was a higher concentration of FHA loans that were designated as seriously delinquent, with a continued increase during the third quarter. VA loans also saw a slight increase in serious delinquency, while conventional loans saw a slight decrease. Higher delinquency rates are more typical for FHA loans, given their concentration in lower-income and first-time borrowers; however, a growing share of VA borrowers are starting to become seriously delinquent.

Borrower-level pressures that may drive future delinquencies

While mortgage delinquencies are still below historical averages, there are headwinds that could result in delinquencies increasing in 2026. Effective Aug. 1, interest resumed accruing for borrowers enrolled in the SAVE (Saving on a Valuable Education) income-driven repayment plan, which limits payments based on income while those borrowers remain in administrative forbearance. Dates for when repayment will need to resume vary, with some running out to 2028, but repayment of student loans could come sooner.

Separately, the current administration has announced that it will begin resuming wage garnishment for federal student loan borrowers who are in default. For those borrowers who have both a mortgage and student loans, this could create financial constraints. For borrowers with Adjustable-Rate Mortgages (ARMs) or plans to refinance, many have remained “house rich but cash poor” longer than expected, as the rate-cut cycle was initially slower than anticipated. While rate cuts later accelerated, elevated yields have limited the pass-through to overall mortgage rates. Further, elevated consumer prices resulting from the prior inflationary period, combined with variability in Consumer Price Index (CPI) and Producer Price Index (PPI) readings due to tariffs and the recent government shutdown, along with emerging uncertainty in the labor market, create conditions that support continued pressure on borrower performance and elevated delinquencies.

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Why rising delinquencies matter for servicers

Overview of servicing advances

Not every borrower makes timely payments, payments in full or even payments at all. In these cases, servicing entities are typically required to “advance” the P&I, known as principal and interest advances, and T&I, known as escrow advances. Entities may also incur recoverable corporate advances, which are expenses the servicer paid that are recoverable from the borrower, such as bankruptcy fees, forced placed insurance and other expenses.

Further, entities may incur nonrecoverable corporate advances, or the fees that the servicer determined in its good faith business assessment will not be recovered. Many of these corporate advances (also known as foreclosure advances) are tied to the preservation and, if necessary, the liquidation of the mortgaged properties.

The shift from borrower risk to servicer exposure

As a number of borrowers become delinquent and more seriously delinquent, the greater the cost to the organization (cost of servicing) to arrive at a successful outcome and the greater the opportunity for error. Offsetting the risk of delinquency is the increased equity in a borrower’s homes (to the extent the borrower hasn’t pursued a Home Equity Line of Credit (HELOC) for home improvement or to cover other debt), where upon a liquidation scenario, the increased equity will support higher recoverability of advancing requirements.

Complexity in advance recovery and compliance

Recovery pathways and timing

Advances are recovered from borrowers when payments are ultimately made by the borrowers, liquidation of the property or by filing claims with the various agencies or companies that insure the loans. During the collection process, servicers incur costs associated with trying to collect the payments, the foreclosure process and ultimate sale of property in liquidation scenarios. The expenses incurred (advanced) by the servicer are due back to the servicer, which may be repaid by the borrower, investor or through liquidation.

Servicers should have controls around the appropriateness and collectability of advances and compliance with regulatory, investor and insurer guidelines. In addition to the investor and insurer guidelines, many states and counties have guidelines around what can be assessed to the borrower and minimal entitlements that the borrowers are allowed. For example, many states and counties have criteria supporting what lien release fees can be charged to the borrowers and every state has guidelines around foreclosure, while some states require minimum interest that is due on borrower escrow funds. Costs associated with bankruptcy liquidation are also complex since it’s guided by jurisdictional specific guidelines.

Evolving loan programs

With more lenders participating in downpayment assistance programs, servicers need to comply with the loan program guidelines, occupancy requirements, repayment or forgiveness terms, lien position, among other requirements. With the qualified mortgage market opportunity being tighter over the last couple of years, lenders have pursued more nonqualified mortgages (non-QM). Non-QM mortgages present servicing complexities that have been less common in recent years, such as alternative income verification, elevated default risk, regulatory uncertainty, inconsistent investor guidelines and heightened market-based liquidity risk.

Non-QM loans are not backed by the government or government-sponsored enterprises (GSEs), which may present differing assumptions for current expected credit losses (CECL) and fair value models. With an increase in seriously delinquent loans and the potential for future delinquencies, servicing advances have been identified as a heightened risk for operators holding these advances. To complicate matters, while interest rates remain elevated, refinancing and modification programs are currently constrained, affecting the ability to recover principal and interest advances without pursuing liquidation. This has caused many organizations to focus on the advance recovery processes to limit operational losses and minimize liquidity impacts of advancing obligations.

Where losses hide: Advances, reserves and financial governance

Due to the complexities and manual nature of servicing, it is often challenging to identify the areas influencing ultimate collectability, creating the potential for additional losses. These hidden losses and the long-time frame until collection make the implementation and management of reserve methodologies even more challenging. Those charged with financial governance also need to evaluate whether losses on advances are related to credit issues or operational losses and the related accounting associated with this.

Issues impacting hidden losses on servicing advances

Incomplete or inaccurate data driving recovering monitoring and reserving
Reimbursement of advances through complex claim processes by multiple different agencies
Robust and complex investor, regulatory, judicial guidelines and new program guidelines on what is recoverable
Multiple stakeholders contributing to this process, including investor reporting, loss mitigation, administration and accounting
A significant number of transactions with multiple manual data checks and monitoring in place

Issues impacting the recovery of servicing advances

Paying expenses that are greater than the amounts permitted under contracts
Inaccurate coding of advances as recoverable or nonrecoverable, or recoveries up to a certain threshold
Assessment of advances that are prohibited under state statutes and investor guidelines
Nontimely or incomplete quality control of vendor services
Losses due to incomplete or inaccurate modification or payoff
Nonrecovery due to incomplete or untimely claim processes
The inability to separate servicing fee recoveries from advance balances in the claim proceeds
The receipt of claim proceeds and the ability to get them applied and reported correctly
Incomplete or inadequate loss analysis resulting in incomplete reserves and the lack of data to mitigate estimation mistakes

Baker Tilly’s Mortgage Center of Excellence offers assistance with servicing, regulatory compliance, quality control and risk management — all in one place. Our mortgage specialists can help servicers traverse the ever-changing mortgage landscape. Discuss the state of the industry with our team and how we can help you prepare for the future, today.

To stay on top of the latest updates, and to hear more about how our specialists can assist you and your organization, feel free to reach out or refer to our Mortgage Center of Excellence webpage for more information.

The co-author for this article, alongside Baker Tilly’s Chuck Kronmiller, was Matt Petrick, chief financial officer and treasurer at PEAC Solutions.

Matt Petrick, CPA, is a senior finance and accounting executive specializing in the financial services industry, with a focus on specialty finance, mortgage and servicing entities. Matt has experience with REITs, financial institutions, business development companies and other funds. The discussions throughout the article should not be implied to represent the position, processes, or procedures of professional affiliations, current or former employers, or employer relationships.

The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought.