Servicers preparing for a new surge in their FHA loan portfolios

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Many servicers expect their Federal Housing Administration mortgage portfolios to grow in the next year or two, and that increase could coincide with an uptick in delinquencies, warns Altisource Portfolio Solutions.

Among companies that service FHA product, 72% are expecting growth, and 77% of those are expecting the increase in loans to exceed 25%, the company found in a recent survey of 200 mortgage professionals. Of the latter group, 34% think the increase will be greater than 50%. The FHA will be raising its loan limits by almost 7% next year, which could boost originations.

While housing and loan performance overall have been strong, there is concern both are overdue for reversals. If the economic cycle were to take a turn for the worse, it could be particularly tough on servicers handling a growing volume of FHA loans.

"Recent economic indicators suggest that the housing market is approaching an inflection point. While delinquency and foreclosure rates remain low, home price appreciation is slowing and interest rates are rising," Patrick McClain, a senior vice president at Altisource, noted in a press release. "With lower origination volumes and an expanding credit box, servicers expect to see growth and increased delinquencies in their FHA portfolios."

Altisource's survey has plus or minus error of nearly 7%, and a 95% confidence level.

FHA loans generally have a weaker credit profile and are tougher to service than other types of government-related mortgages, but servicers are compensated with relatively higher fees.

All distressed mortgages have a relatively higher cost to service than performing product, but FHA loans in particularly are nettlesome when they fail to perform, because there is a complex claims process servicers have to undergo to recoup expenses related to handling the government-insured loans.

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