A recent Mortgage Note article highlighted a split housing outlook for 2026: improving affordability for homebuyers, but rising pressure on homeowners living on the edge.
According to ICE’s latest data, home price growth slowed to just +0.7% in 2025 — the smallest annual increase since 2011. Wage growth outpaced home prices, and mortgage rates began 2026 around 6.15%, improving affordability for prospective buyers.
But beneath that positive headline is a more concerning trend for mortgage servicers.
Equity is Thinning, Especially in FHA
Negative equity rose sharply in late 2025, ending the year with 1.1 million borrowers underwater. Another 3.2 million borrowers have less than 10% equity, leaving them vulnerable to even modest price declines or income shocks.
In certain markets, more than one in twenty borrowers are underwater.
For FHA-insured loans, the situation is more acute.
Over the past five years, the delinquency spread between FHA loans and the broader mortgage market has widened. At the same time, partial claims (once a stabilizing tool) have become increasingly constrained. The share of borrowers with a prior partial claim has surged from 5% in 2020 to nearly 50% in 2025.
Equity cushions are thinner. Borrowers are younger in their loan life. Many are first-time homeowners with high debt-to-income ratios.
This is where servicing strategy matters.
Engagement Must Happen Earlier
The data suggests a likely rise in FHA foreclosure referrals by mid-2026. But that outcome is not inevitable.
Early engagement and complete, transparent communication can significantly alter borrower behavior. When borrowers understand their full range of options, and the long-term consequences of each, they are better positioned to make rational decisions.
In some cases, that may mean retaining the home through sustainable modification. In others, it may mean exiting the property before equity erodes further.
Staying in an unaffordable home helps no one.
What This Means for Servicers
For servicing leadership, 2026 will require:
- Stronger borrower outreach earlier in delinquency
- Clear, consistent communication about available options
- Tight quality control to avoid costly misinterpretation of evolving policies
- Operational discipline in managing FHA-specific risk
Markets are stabilizing for buyers. But for servicers managing higher-risk portfolios, vigilance and proactive engagement will define performance this year.