By Brent Potter, Chief Operating Officer, LoanCare
Mortgage servicers have spent much of the past decade operating in a relatively benign default environment. But there are growing signs that may be changing.
Certain segments of borrowers are falling behind on their mortgage payments as a result of higher household costs, credit card and student loan debt, and other factors. This is particularly true of 2022 and 2023 cohorts that used low-down-payment government loan programs to purchase a home when prices were near record highs. According to ICE's August 2026 Mortgage Monitor, approximately 813,000 borrowers are underwater, up 44% year over year. FHA and VA borrowers who purchased homes between 2022 and 2025 account for a significant share of that population.
MBA data also show an increase in delinquency rates among government-insured and guaranteed loans. In Q1 of 2026, the FHA loan delinquency rate was approximately 900 basis points higher than the conventional-loan delinquency rate, while the VA loan delinquency rate was approximately 225 basis points higher. These are the widest spreads since 2021, according to the MBA's Marina Walsh. Given recent changes in government and investor programs, loss mitigation options are more limited for borrowers who have had repeat modifications.
That doesn't mean the industry should be preparing for a repeat of 2008. But it does mean lenders should be asking an important question: If borrower stress increases, are we ready?
The answer isn't simply a matter of having enough staff to handle higher default volumes. True default preparedness starts much earlier. It requires servicers to have the data, technology, processes, and communication strategies in place to identify stress quickly, engage borrowers effectively and help them find the right solution before their financial situation becomes more difficult to resolve.
In other words, the best time to prepare for rising defaults is before they arrive.
The first 60 days can change the trajectory
When a borrower misses a mortgage payment, time matters.
There are generally more options available to someone 30 days delinquent compared to someone 90-120 days delinquent. And as delinquency continues, the amount owed increases, hardships can become more complicated and the path toward a sustainable resolution can become narrower.
That's why early intervention should be one of the foundations of any modern default strategy.
Historically, however, default servicing has often relied heavily on a relatively one-size-fits-all approach to outreach: make a phone call, wait, call again and continue repeating the process until the right party contact is made. That approach is increasingly out of step with how borrowers communicate today.
Servicers and subservicers already possess valuable engagement data. They can see when and how borrowers access their accounts and which channels generate the highest response rates. The opportunity is putting those insights to work in default management.
Rather than asking, "How many times have we called this individual," we should be asking, "What is the most effective way to reach them?" For one person, the answer may be a phone call. For another, it may be a text message. Someone else may prefer email or a notification when they log into their account.
Using data to better understand those preferences helps us make meaningful contact earlier, when there are typically more opportunities to help.
Digital doesn't mean impersonal
Conventional wisdom suggests that improving the borrower experience in default servicing means putting more people on the phone.
Human interaction absolutely remains essential. There are conversations in default servicing that require empathy, education and judgment. Telling a family what options are available when they're struggling to make their mortgage payment cannot always be reduced to a digital interaction. But that doesn't mean every interaction needs to happen over the phone.
People today expect to manage significant parts of their financial lives digitally. They may not want to discuss their circumstances over the phone around co-workers during office hours. Instead, they might prefer to log in after work and see what documents are outstanding. They want to check the status of a request without waiting on hold. They want to respond to a text when it's convenient rather than playing phone tag during business hours. Borrowers don't suddenly abandon those expectations because they become delinquent.
Giving them greater digital access can actually create more room for meaningful human interaction. Routine status updates, document collection and straightforward transactions can occur digitally, allowing servicing professionals to spend more time with borrowers whose circumstances require conversation and guidance.
The goal isn't to remove people from default servicing. It's to make sure people are involved when and where they add the most value.
Prepare the operation before the pressure arrives
Early intervention is only possible if the servicing operation itself is prepared. Having worked through multiple cycles of significant mortgage stress, I've learned that you don't want to begin building your default infrastructure after volumes start increasing.
The financial crisis taught the industry hard lessons about capacity, processes and borrower communication. The pandemic created an entirely different kind of servicing challenge, requiring organizations to respond to unprecedented circumstances at tremendous speed. Those experiences matter.
Teams that have operated through stressed environments understand where cracks are likely to emerge. They know which processes become bottlenecks, where technology needs to scale and where borrowers are most likely to encounter friction.
That experience should guide investments before the next period of stress.
Too often, organizations wait until they need additional capabilities to build them. When defaults rise, they add staff, modify workflows, introduce new technology and try to solve operational problems while simultaneously serving a growing population of borrowers who need assistance.
LoanCare has extensive experience servicing higher-risk loan populations, which is why we invest in technology and processes before those capabilities are required at scale. Internally, our teams and executives are always asking what would happen if defaults increased materially over a 90-day period, or if a natural disaster suddenly affected thousands of our clients' customers. Are the systems ready? Are the workflows ready? Are the people ready?
Preparing in advance isn't simply an operational advantage. It directly affects the customer experience. When servicing organizations are scrambling internally, customers inevitably feel the effects.
Technology needs to be tested under pressure
The industry is seeing no shortage of new technology promising to transform mortgage servicing.
Many of those tools are impressive. But when evaluating technology for default servicing, there is another question worth asking: Has it ever been stress tested?
A platform can work exceptionally well when delinquency volumes are low. The real test comes when volumes rise, circumstances become more complex, and investor requirements and regulatory timelines have to be managed across thousands of cases simultaneously.
The same question should be asked about the people and processes behind the technology. Have they been through a stressed servicing environment? Do they know where operational weaknesses tend to appear?
Experience doesn't replace innovation. It enhances it, allowing subservicers like LoanCare to apply technology to the problems that actually emerge during periods of stress rather than simply automating existing processes.
Earlier action creates more opportunity
Ultimately, default servicing is about reaching the best sustainable outcome available to each individual.
Sometimes that will mean bringing the loan current. Sometimes it will involve a modification or another loss mitigation option. And in certain circumstances, the appropriate outcome may involve transitioning out of the home.
Those are very different outcomes, but they share something important: the earlier the intervention, the more opportunity there is to identify the right path. That's why default preparedness can't begin when delinquency numbers start flashing red on a dashboard.
It begins with understanding the portfolio. It requires investing in technology before capacity is strained. It means using data to recognize how borrowers want to communicate and removing unnecessary friction from the process. And it requires experienced people who know when technology can solve a problem and when a borrower needs a human on the other end of the conversation.
We can't know exactly what the next period of mortgage stress will look like. But we can make sure we're ready for it. Reaching borrowers earlier, communicating with them more effectively and connecting them with solutions sooner starts with having the right infrastructure in place before it's needed. The best subservicers do not simply react faster. They prepare earlier.
