Review of mortgage resolutions, forbearances and defaults

About 2.4 million mortgages are either forborne or in arrears; as an estimated 707,000 of them were still abstaining in February, according to the latest report from the Federal Reserve Bank of Philadelphia.

Given that most of these plans will expire within the next five months and foreclosure protections expired on January 1, we are at a critical stage in this final stage of the housing market’s post-pandemic recovery.

In Philadelphia Federal’s latest monthly report, experts documented the first wave of mortgages that were referred to foreclosure. The data shows that they have already recovered to pre-pandemic levels. We also provide details on the disposition of the 8.4 million mortgages that have gone into forbearance since the start of the pandemic.

The good news here is that three quarters are performing or paying. Of the 964,000 seriously delinquent mortgages not in forbearance, about half are on loss mitigation plans, but while they are in loss mitigation nearly three-quarters are not paying. Minority and low-income borrowers still have higher shares of non-performing mortgages, increasing the importance of the loss mitigation plans discussed below.

In February, approximately 707,104 mortgages remained outstanding. These include Federal Housing Administration (FHA), Veterans Affairs (VA), and the two Government Sponsored Enterprises (GSE) mortgages – Fannie Mae and Freddie Mac – comprising most federally insured mortgages , as well as major private sector companies. mortgage loans from private label mortgage-backed securities (PLMBS) and portfolio loans.

While 84% of all forbearance mortgages are set to expire by June 2022, GSE forbearances now make up the dominant share. Their pandemic-related forbearance plans all have an expiration in June 2022, which explains the large number of expirations in June.

Unless mortgage managers can successfully execute stay-at-home options in the coming months, many borrowers face the prospect of selling their homes or losing them to foreclosure. The FHA/VA has 272,645 mortgages still forbearance because its activity targets low-to-moderate income borrowers, who also have higher minority shares.

For borrowers who can resume regular payments, missed payments can be repaid in a lump sum, with a repayment plan, or with a deferral or partial claim, in which the missed payments are placed in a subordinate, non-interest bearing lien to be repaid when the mortgage is paid off.

For borrowers who cannot resume regular payments, loan modifications to reduce monthly payments are available with plans announced by FHFA for GSE loans and HUD for FHA and VA loans. As shown in Annex 2, 31% of borrowers have chosen the first option to date. Some borrowers will not be able to – or choose not to resume – their regular mortgage payments.

Loan modifications that reduce the mortgage payment are available for these borrowers; 10% have already done so, and an additional 2% are in transition for a change (i.e. a “trial change”). To achieve this, the FHFA and HUD have adopted payment reduction targets of 20% and 25%.

To assess the effectiveness of the FHFA and HUD plans for FHA loans meeting their targets, Philadelphia Federal calculated average declines in principal and interest (P&I) payments and for full mortgage payments that include escrows, typically consisting of principal, interest, taxes, and insurance (PITI). The top three federally insured programs are the GSE Flex Mod and the two FHA COVID-19 Recovery Mods, starting with a 30-year mortgage, followed by one with a 40-year mortgage, which is still in development.

To read the full report, including charts and methodology, Click here.

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