The Coming Surge in Mortgage Modification Defaults
The Foreclosure moratorium for loans that are backed by the Federal government had been extended several times, and with the latest extension expired last July 31, 2021. This means that a lot of homeowners who are behind on their mortgage payments have two choices: they either have to pay up or they have to apply for additional mortgage relief.
The foreclosure moratorium helped homeowners with their mortgage payments and were prevented from being forced out of their homes – and thanks mainly to the Coronavirus Aid, Relief, and Economic Security or CARES Act which was passed last March 2020.
Under the CARES Act., distressed homeowners managed to significantly reduce their mortgage payments either by skipping them entirely for up to a year (12 months). And while homeowners are still on the hook for any payments they failed to make, missed payments under the forbearance program were not reported as delinquent. Furthermore, this will not have an effect on their homeowner’s credit reports.
Distressed homeowners that are not subject to any mortgage forbearance during the course of the health crisis still have until this month end of September to apply for additional forbearance program which can last for six months. Homeowners who are currently in a forbearance program and have not made any mortgage payments during the course of the recession are lucky too. They can also apply for a three month extension on their forbearance. Borrowers who are delinquent for more than 90 days on their mortgage payments have to choose another payment option – Mortgage Modification.
Modification on the Offing
The Federal Housing Administration or the FHA has offered help and aid to all of these seriously behind and financially distraught homeowners during this pandemic – the Covid-19 Advance Loan Modification or COVID-19 ALM.
Rather than forestalling mortgage payments for a certain period of time, this mortgage modification program changes the base terms of a mortgage. And this lets the financially troubled and already on default homeowners to catch up under a more manageable terms and conditions. The same would hold true for those homeowners whom default is imminent. The Federal Housing Finance Agency or FHFA have also reported that technically, fewer mortgage payments were delinquent in 2020 as compared to a year prior. On the surface, this report may sound like only a few homeowners will actually need the help of the mortgage modifications. But the truth is the data is a bit misleading.
The FHFA estimates that the past dues can more likely be more than 3% than what was actually reported since late payments for mortgages in forbearance as part of the CARES Act were not added as delinquent. The actual figure is higher as compared to the previous years.
And as a result, it is more likely that we are going to look at a huge wave of homeowners who will be applying for relief using the mortgage modifications program. What makes this troubling is that the soon-to-be rise in mortgage modification coincides with the reality that the employment rate in the state of California is still down 1,4 million jobs versus a year prior the 2020 recession.
And without access to a more stable and reliable source of income and jobs, a lot of these homeowners who are currently depending on CARES Act mortgage relief are going to be on default once again especially when the relief are fully exhausted. This especially for those who opt into the FHA COVID-19 ALM aid would mean a coming surge in modification defaults.
History Repeat itself
It is quite convenient on our part to forget that we were in this position before. We have been here then during the years of the Great Recession. And it was during this dark time that a similar mortgage modification program yielded a whopping 60% re-defaults across the country just only a year after a modification was passed and implemented.
In the first half of 2010, thousands of these modifications were cancelled. This is a direct result of delinquent homeowners who despite having agreed to change and alter the mortgage terms, still failed to keep up with their modified payments. During that time, the modification that was extended, offered a short term solution for the underlying problems of rotten mortgages, and there a small chance that the impending surge in re-defaults will match the extremes of the after effect of the Great Recession – the housing market right now is not similar to the market of 2009. Currently, home prices are prices are still up and this allows homeowners especially who have built enough equity, to just simply make the decision and sell the house in order to avoid facing foreclosure. But for those who are struggling to repay delinquent mortgages, modification will be the most practical option, and as the state of California continue its problematic jobs recovery, more homeowners are more likely make mortgage payments that they may have lagged behind in the recent months.
Eventually, it is difficult to say exactly how many of these homeowners are going towards default or how many homeowners are heading towards foreclosures. Even as the rates of past-dues have stayed relatively low, the percentage of homeowners who are in forbearance has, as expected, spiked since the beginning of the recession –pointing to an increase in forbearance extensions and mortgage modification after this federal foreclosure moratorium ends. And while it is not likely that the rate of e-default will be as high, the current sluggish jobs opportunities means that homeowners are still having hard times as a direct effect of the recession and not to mention, the global health crisis, and this will spread for years to come. Mortgage modification is still a band-aid solution or a short –term solution that is only as effective vis-à-vis homeowners’ capacity to pay.
Without jobs and other source of income, these wage earners will not have the capability to make mortgage payments, they just don’t have the financial ability to make payments, and this means that the government will have to spend more on job creation. And this could be the best solution in order to keep countless of distressed homeowners in their homes. And make no mistake – for those financially troubled homeowners who decided to take the FHA’s offer of federal mortgage modification, a spate of re-defaulting borrower is on sight.