A Brief Update on the FHA Waterfall

On January 16, 2025, FHA updated its COVID-19 Recovery Loss Mitigation Options available to borrowers to help them avoid foreclosure and sustain homeownership[1]. Briefly, there is a set of tools available to delinquent borrowers that allow them to return to making recurring payments. This is a complicated set of programs, but we break these down into three main categories:
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1. Partial Claims: For borrowers that have unpaid balances but can make payments, a “second lien” type of structure is created consisting of the unpaid balance that comes due when the “first lien” is terminated by a sale or a refinance. This process is known as a “Partial Claim”. A lot of loans are securitized into RG (reperforming) pools by Ginnie Mae. According to the FHA 2024 MMI Fund report, 1.4mm partial claims were applied during FY 2021-FY 2024[2].
2. Modification: ​Should a borrower be unable to make payments following a partial claim, they may be modified to reduce balances going forward. The main modification is achieved by extending the loan term to as long as 30 years. Ginnie Mae securitizes these loans into Mod pools.
3. Extended Term: Should available modification programs not allow the borrower to return to current status, a last-ditch option is to extend the maturity out to 40 years. These loans are securitized by Ginnie Mae into “ET pools”.

Below find a chart of 90+ day delinquencies by loss mitigation types, and a table showing the current market share of each as of April 1, 2025:

RUN UNDERLYING QUERY

Note that the 90+ DQ rates for RG and non-ET mod loans are significantly lower than ET loans, due to that the servicers have the option to buyout the loan, modify further, and re-deliver them back to a Ginnie Mae pool. At the end of the process, ET pools, this seriously delinquent rate stands over 25%. It’s further interesting to note that after a sharp rise in delinquencies last year, we currently observe some modest easing in distress in early 2025. In light of the current environment of extreme economic and policy uncertainty, it is impossible to know how loan performance will evolve during the course of the year. But a more meaningful sense of progress can be obtained through careful observation of each of these components obtained through cloud-based tools.

The current waterfall expires on February 1, 2026.

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[1]https://www.hud.gov/sites/default/files/OCHCO/documents/2025-06hsgml.pdf
[2]https://www.hud.gov/sites/dfiles/Housing/documents/2024FHAAnnualReportMMIFund.pdf