Servicers may need to rethink loss mitigation as defaults rise

Mortgage servicers are benefitting from a 17-month low in prepayment speed, but a rise in delinquencies are forcing them to rethink their risk management strategy.

"After a few calm years on the loss mitigation front, the rise in serious delinquencies in late 2025 and 2026, alongside mixed home price trends across the U.S., means a renewed focus on loss mitigation efforts for mortgage servicers," Andy Walden, head of mortgage and housing market research at ICE, told National Mortgage News. "Many scaled down their loss mitigation teams during the quiet years, so they're now rebuilding capacity just as volumes climb."

Strong equity has been prominent and helped limit risk, but there are a broader range of outcomes now. This means servicers may need to use a wider swath of their loss mitigation tactics rather than relying on the same few options that worked when most borrowers were sitting on significant equity, Walden said.

The national delinquency rate rose 14 basis points to 3.53% last month but was essentially flat after accounting for July's calendar-driven decline, according to the August 2026 ICE First Look report. The delinquency rate climbed 10 basis points year over year but remains 35 basis points below its August 2019 level and less than every other prepandemic August on record, the report found.

Loans 30 and 60 days past due rose month over month but were still down 21,000 from a year ago, while seriously delinquent loans rose by 11,000 to 574,000, ending five months of declines, and were 19% above last year. The serious delinquency rate was still in line with pre-pandemic levels at 1.04% of active loans, according to the report.

Regionally, southern states recorded the highest delinquency rates, led by Louisiana at 8.4% and Mississippi at 8.3%, while Idaho nearly posted a sub-2% rate. Hawaii saw the largest annual change by far at 31.7%.

Single-month mortality decreased 11 basis points to 0.64%, marking a fifth consecutive monthly decline as mortgage rates drew closer to 7%. Recent originations from 2023 to 2025 led the fall, with the single-month mortality easing to 0.91% from a peak of 2.32% in March, the report found.

"Slower prepayment speeds signal extended cash flows, both for mortgage-backed securities investors in the form of interest income and for servicers in the form of servicing fee revenue," Walden said. 

"That's particularly true for the higher-rate mortgages originated from 2022 to 2025, which just a few months ago were running off relatively quickly," he added. "While that reflects less refinance activity in the market, it also means slower churn inside servicers' books and fewer loans they need to replace to offset runoff."

The report also found foreclosure starts fell 5.8% in August but were still up 29% annually. Sales dipped 1.7% as well, running at 57% of August 2019's pace despite being up 11.7% year over year.

Foreclosure inventory remained largely unchanged, as the presale rate held at 0.54%, matching its highest reading since February 2020. Active inventory rose by 2,000, the smallest monthly gain since last November, but still up 89,000, or 41%, on a yearly basis, according to the report.

"While overall performance remains sound, the market isn't moving uniformly," said Bob Hart, president of mortgage technology at ICE, in a press release Monday.