FHA’s Distress Wave & Crazy VantageScore-FICO Spreads

In today's edition of The Scoop, we dig into the first stress fractures in FHA servicing —> why some servicers think the real damage is still six to 18 months out, & how exploding escrow costs & returning student debt are colliding just as the safety net comes off. The first likely casualties? Borrowers who received help via down payment assistance programs.

Also in today’s edition: Freedom Mortgage settles a lawsuit over unpaid pre-shift work tied to its sprawling software stack, early VantageScore 4.0 comparisons that are making some LOs do double takes, new reporting on UWM’s dominance w/ small brokers, a big departure at ICE & more.

Ut oh, the COVID-era servicing bill appears to be finally coming due. FHA foreclosures in Q1 surged 28% y-o-y, according to Attom. It’s the first crack in a delinquency wave servicers told American Banker will widen for the next 6 to 18 months as the last of the Covid-era safety net unwinds.

You may recall that the Trump administration pulled the plug on Sept. 30, ending years of FHA forbearance & loss-mitigation flexibility that IMO was way too tolerant. New rules cap borrowers at one mod every 24 months & require a three-month trial period before any mod sticks. As we’ve previously detailed, the reporting shift alone has pushed a lot of loans into delinquent buckets.

"We've reached a period of exhausted loss mitigation & there's no more to give," Ron Malik, SVP of default operations at Dovenmuehle, told Kate Berry.

The squeeze is coming from a couple different places. Deferred CARES Act balances are maturing into balloon payments. At the same time, property taxes & insurance are up a metric fuck-ton (that’s a technical term). Student loan payments have also returned & people ring up high balances via BNPL, so there’s simply not much cushion.

FHA loans paired w/ one of the 2,500 or so DPA programs come stacked w/ higher DTIs & thinner margins, & these are exactly the borrowers who break first.

Former Ginnie Mae chief Ted Tozer sees the real danger at the servicer level, where firms are still on the hook to advance principal & interest to bondholders on delinquent loans. "You could have a flurry of independent mortgage banks that get in financial trouble," he warned.

HUD & FHA have also lost a massive amount of staff to DOGE cuts, w/ even deeper RIFs queued. That should make things interesting as short sales & deeds-in-lieu really start to hit. The Fed flagged "some distress" in FHA & VA loans in its May stability report.

To be clear, there’s no reason to think a crisis is coming. Servicing values are still rising & many borrowers have seen their home values go up 35% since COVID. But more recent homebuyers may be underwater… 

Freedom Mortgage will pay $750K to settle a lawsuit w/ over 900 employees at its call centers. The plaintiffs say they worked unpaid overtime by spending extra time logging into Freedom’s various software applications before being required to answer calls when they clocked in. NMN first reported on the case.

The customer service agents say their workload nearly doubled in early ‘24 when Freedom implemented new AI software. Call center workers were asked to work 1-to-2 "mandatory" overtime days per week, clock in over an hour earlier each day, & take a reduced, 45-minute lunch break, the suit alleges. 

Employees had to log into multiple software programs before clocking in, which took up to 10 minutes. Those include the platforms NICE, Sagent, Salesforce, Softphone, Freedom Engage, EDMS, & Duo. Per the filings, had Freedom not settled, it would have likely argued that the pre-shift work isn't compensable under the FLSA, because it's not an "integral & indispensable" activity.

I reckon we won’t see a significant amount of VantageScore 4.0 volume for months (for reasons that I’ve already outlined). But I’ve been asking sources to send me what they’re seeing in the early days. And some of it is pretty insane! Like, you-won’t-believe-the-difference-between-Vantage-and-FICO Classic insane.

For paid subscribers, I’ve got details on that. Plus, UWM’s stickiness w/ small broker shops & how its finances look, a big-name departure at ICE Mortgage Technology, a $225M lender gets acquired by a little-known fintech, Rohit Chopra returns & much more.