Higher interest rates, valuations limit benefits of loan modification


While the loan modifications are providing much-needed relief to borrowers who have dropped out of forbearance in recent months, the impact of the relief is well below the targets set by federal officials.

In a new report, researchers from the RADAR Group at the Federal Reserve Bank of Philadelphia said that “with recent increases in interest rates, average payment reductions have declined significantly and are now below program targets for the most borrowers.

Struggling borrowers with mortgages backed by government-sponsored companies Fannie Mae or Freddie Mac or the Department of Housing and Urban Development were able to opt into loan deferral and modification programs at the end of their forbearance. they couldn’t start making regular payments again. Changes to the GSE flex program aimed to reduce monthly principal and interest, or P&I, payments by an average of 20%. For the Federal Housing Administration program, the expected payment reduction was set at 25%.

But the acceleration of mortgage rates in 2022, with the Freddie Mac reference having increased by almost 2 percentage points since the end of last year, is the main cause of the lower than expected declines in P&I payments, with the share of eligible borrowers receiving target reductions being less than half. In December, the average P&I reduction for households in the GSE flex mod program was 27%, but by mid-May it had fallen to just 16%. For borrowers who entered the FHA COVID-19 Recovery Mod Program on a 30-year term basis, the reduction in P&I paid was only 22% in May.

Among borrowers eligible for the Federal Housing Finance Agency’s GSE program, only 23% would be able to meet the target with the new 5% modification interest rate that took effect on May 13, found the RADAR group, while the guaranteed HUD program fared slightly better, with 34% hitting the mark.

The limit on allowable principal balance deferral also impedes the reduction of P&I for the GSE modification program. Program rules prohibited this amount from exceeding a minimum loan-to-value ratio of 80%. Last year increase in home equity effectively placing most mortgages below the threshold.

Philadelphia Fed researchers determined that if borrowers were not subject to the LTV restriction, 98% of borrowers would meet the reduced P&I target, with an average decrease of 36%, even taking into account the rules prohibiting deferrals of up to 30% of the unpaid balance. .

The introduction of HUD’s FHA COVID-19 recovery modification based on a 40-year term in June will provide another option for borrowers.

“If the 40-year term is passed in June, 90% of FHA mortgages will meet their targets,” the report said. “So a big factor in the success of the FHA program will be how quickly repairers start extending mod terms to 40 years.” The average P&I reduction for HUD-backed borrowers in the program would increase to 26%, Philadelphia Fed researchers predicted.

U.S. homeowners were able to enter into forbearance plans with a hardship declaration at the onset of the COVID-19 pandemic in 2020 thanks to the CARES Act. Of the more than 8.5 million people who abstained at some point in the past two years, 16% have yet to start making payments again, according to Black Knight. Fewer than 600,000 mortgages currently remain outstanding.

Borrowers who left forbearance also had the option of resuming regular payments instead of a loan modification, with any missed amounts being repaid in a lump sum, either through a repayment plan or with a postponement or partial claim. The full amount of missed payments would be placed in a non-interest bearing lien to be settled upon settlement of the mortgage. About 30% of waived borrowers chose this option.

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