With FHA trial plans failing and VA options limited, a loss mitigation veteran says foreclosures are likely to increase
While the overall foreclosure picture remains below pre-pandemic numbers, two loan sectors are starting to show warning signs of bigger problems.
Overall foreclosure activity in the United States rose 21% in the first half of 2026, according to ATTOM's mid-year U.S. Foreclosure Market Report released last week, with 227,548 properties carrying foreclosure filings through June, up 28% from two years prior.
For one executive, the numbers are not a surprise. Donna Schmidt (pictured top), president and CEO of DLS Servicing, has spent more than 40 years in loss mitigation and mortgage servicing. Her firm works with 59 different servicers, including state housing authorities, banks, credit unions, IMBs, and large subservicers, giving it a broad view of delinquency and foreclosure trends across the industry.
She has been warning clients about foreclosure increases in both FHA and VA since last July.
"I have been beating this drum since last July," Schmidt told Mortgage Professional America. "We knew these foreclosures were coming. At least in the FHA space and in the VA space. Those are the two areas getting impacted the worst."
‘A pig through the python’
The FHA problem, Schmidt said, has its roots in how COVID-era loss mitigation programs were structured.
"During COVID you could fog a mirror, and you got a workout," she said. "There's always been a steady foreclosure drum beat in FHA. It dried up during COVID. So we have four to five years' worth of normal activity. There's a pig getting ready to go through the python."
When new FHA loss mitigation rules took effect October 1, 2024, every defaulting borrower entered a trial plan rather than being brought current, and when those plans concluded in early 2025, the failure rate was alarming.
"In the initial stages, 60% of the borrowers were defaulting on their trials," she said. "Across our network, which I think is a pretty good sampling, we saw about 60% of these people failing because these were the steady people that just kept re-hopping on. They would make one payment, sometimes none, and get another partial claim."
That rate has since moderated as the chronic re-defaulters cycled out, with failures dropping to 40 to 50 percent, Schmidt said. Borrowers who completed their trial plans and received modifications are now re-defaulting, and FHA’s 24-month rule is leaving some with no options.
The VA situation has a different cause. Schmidt said that since Congress canceled the Veterans Affairs Servicing Purchase (VASP) program, the partial claim program that replaced it is narrowly eligible and can only be used once in the life of a loan.
In the current rate environment, VA borrowers who defaulted on loans at 4% are being modified to a market rate of roughly 7.125% based on current PMMS calculations, meaning a borrower who could not afford the lower payment now faces a payment nearly double that amount with no reduced-payment alternative available.
"There is nothing for these borrowers," Schmidt said. "Nothing. What about the borrower with a loss of income? What about a borrower whose spouse has passed away and lost half their income?"
The DTI problem
Looking at the overall picture, the foreclosure rate is starting to return to pre-pandemic levels, according to Mirza Hodzic, managing director and founder of BlackWolf.
“I believe that the market is slowly correcting itself to pre-pandemic levels,” Hodzic told Mortgage Professional America. “I do feel like there’s a bit of an effect on the economic side where we've seen some difficulties for the lower- to mid-income families to make payments. However, there’s really not a concern yet. I think we’ve seen historically low levels during the pandemic. Now it’s slowly kind of picking back up.”
Schmidt said a related data concern sits beneath both the FHA and VA foreclosure trends. According to data from MIAC Analytics, a firm DLS Servicing works with, a growing percentage of loans have a debt-to-income ratio of 50% or greater. She said that makes it far more difficult to budget for life’s financial emergencies.
"Since 2022, 29% of the loans originated had a front-end DTI of 50% or higher," she said. "A hailstorm comes through, knocks a branch on your windshield. You have a comprehensive deductible of $1,000. Where are you getting that from if you have a 50% front-end DTI?"
Schmidt said FHA is the only entity that can address the DTI problem, since individual loan officers and brokers cannot unilaterally impose limits that FHA’s own guidelines allow.
"I really believe FHA has to reel in their DTIs," she said. "They're the only ones who can do it. You can't make a loan officer do that. You can't make a broker do that. FHA has to do it themselves."
Schmidt said the foreclosure pressure is not a short-term problem.
"Be prepared for heavy foreclosures for two to three years in the FHA space," she said. "Sadly also in the VA space."
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