As property tax and insurance costs spike and borrowing costs remain elevated, the primary concern for residential U.S. mortgage servicers in 2026 is declining mortgage affordability, Fitch Ratings said Monday.
Hosting representatives from 20 servicers and master servicers at an annual roundtable event, Fitch said almost half of those attending cited “borrower affordability” as the most significant challenge they face this year.
Summarizing anonymized survey findings gathered during the event, one servicer noted how delinquencies increase more than fivefold when the property tax and insurance portion of a borrower’s monthly mortgage payment exceeds the principal and interest portion.
Real estate market analytics firm Cotality has called rising escrow payments “one of the biggest risks” for the housing market in 2026, as the portion of monthly mortgage payments funneled into escrow accounts (through which many borrowers pay property taxes and homeowners insurance) continues to rise.
Escrow-related expenses increased 30% on average in 2025 nationwide — about 45% higher from five years earlier — to account for 30% or more of a typical monthly mortgage payment in 35 states. Escrow costs constituted 40% or more of a typical monthly mortgage payment in nine states last year.
Cotality also warned at the end of last year that there was “little sign that this growth will slow down.”
It has been more challenging to qualify typical borrowers for mortgages in recent years. This is due to the combination of ballooning loan amounts following years of rapid home price gains, and higher mortgage rates since the Federal Reserve began hiking interest rates in 2022
Yet rising property tax and insurance costs — the flexible portion of a borrower’s monthly payment, compared to typically fixed amounts paid in principal and interest — have rapidly undermined long-term mortgage affordability, or the capacity for a homeowner to afford that mortgage for years to come.
Borrowers are approved or “qualified” to pay a set monthly principal and interest payment based on a snapshot-in-time assessment of a home’s insurance and tax burden. A couple of years into that financial contract, borrowers find themselves in mortgages for which many likely would not qualify if applying for the same loan after the escrow expense increases.
Borrowers approved at a 35% or 38% debt-to-income ratio, for example, can easily find themselves sitting on a ratio of 50% or higher, experts tell Scotsman Guide, leaving households with little financial wiggle room to afford a range of rising living costs, from car insurance and groceries to healthcare and spiking electric utility bills.
Among homeowners facing advanced financial strain, servicers said strong equity positions have supported a shift away from the “strategic defaults” popularized during the 2008 financial crisis, when falling home prices left some borrowers with minimal equity and loan balances exceeding the market value of their homes. In many of those instances, borrowers simply mailed in their house keys and absorbed the blow to their credit scores.
Now, Fitch says consumers are “prioritizing mortgage payments” over other monthly debts like auto loans. Some servicers noted that about 4 in 5 borrowers who have declared bankruptcy have “shed other debt while remaining current on their mortgage.”
As foreclosure inventory hit its highest level in six years at the end of the first quarter, concentration risks are building among newer vintage loans originated since 2022, as well as among government mortgages insured by the Federal Housing Administration.
FHA borrowers represented 55% of all seriously delinquent home loans nationwide at the end of the first quarter, an all-time record, according to ICE Mortgage Technology, a servicing and market intelligence firm. Loans originated since 2022 comprised 38% of foreclosure starts in March and one-third of active foreclosure inventory.