While delinquency and abstention rates appear to stabilize in a stable and familiar pattern following the expiration of COVID-19 relief, some concerning signs have emerged in re-defaults, with negative implications for the effectiveness of loan modifications.
Among loans 90 days past due at some point during the pandemic — whether or not homeowners received relief from federal forbearance — the re-default rate hit 12% as a result of debt mitigation procedures. losses as of Sept. 6, according to a report from the Federal Reserve Bank of Philadelphia. The share went from 10% three months ago.
While it’s “encouraging that default rates haven’t risen as expected,” the rise “could be cause for concern” under market conditions seen as favorable, analysts wrote in the report. produced by the Philadelphia Fed’s Risk Assessment, Data Analysis and Research Group, which used Black Knight data.
But high consumer prices, which have posted annual increases of more than 8% for last six monthskeep taking a nibble in the household budget This year. Rising mortgage rates have also caused negative consumer attitudes towards the housing market and reduce the amount available to borrowers to apply principal and interest.
While the re-default rate among mortgages backed by government-sponsored companies remained at 5% from the measurement taken three months earlier, it rose among other types of investors. Repayments rose to 15% for loans backed by the Federal Housing Administration and the Department of Veterans Affairs, up from 12% in the June report. Portfolio loans recorded a re-default rate of 17%, compared to 16% previously. Meanwhile, private label mortgage-backed securities, which include a large chunk of non-QM mortgages ineligible for federally-linked COVID-related forbearance relief, saw a 33% rate. payment defaults, compared to 31% previously.
About 1.9 million mortgages are currently in default or forbearance as of Sept. 6, according to Black Knight, a similar number to recent months. The total number of forborne mortgages was 470,969.
At the same time, loan modification programs meant to help defaulting borrowers unable to resume regular payments are struggling to achieve targeted principal and interest reductions for the majority of accounts.
“With recent interest rate increases, average payment reductions have declined significantly and are now below program targets for most borrowers,” the report said.
FHA COVID-19 clawback modification for 30-year terms, which aimed to reduce principal and interest payments by 25%, is only successful for 8% in the program, with an average P&I reduction of 14 %. The payback modification extending the term to 40 years yielded only marginally better results, with 9% of borrowers achieving the 25% reduction target, with an estimated average P&I decline of 15%.
Meanwhile, only 23% currently taking advantage of the GSE flex modification program, which aims to reduce P&I by 20%, manage to meet the target, with the average reduction standing at 17%.
The acceleration in mortgage rates in 2022 largely caused the decline in average P&I reductions. Fewer accounts can meet targets after taking into account adjustments made for today’s higher rates, according to the report. By comparison, the average P&I reduction for GSE flex changes in December 2021 was 10 percentage points higher at 27%.