Home Borrower Housing crisis: Why 40-year mortgages could help delinquent borrowers

Housing crisis: Why 40-year mortgages could help delinquent borrowers


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Illustration by Laurent Duvoux

About the Author: Patrick Harcker is the president and chief executive officer of the Federal Reserve Bank of Philadelphia.

The Covid-19 pandemic is not over. But many of the pandemic relief programs associated with it have ended or will soon.

Mortgage forbearance, which began after the Cares Act was passed, is one example. Throughout the pandemic, federal and private programs have allowed borrowers to stay home and stop mortgage payments for up to 18 months without negatively impacting their credit scores.

The number of forborne loans now stands at approximately 680,000 mortgages. That’s a lot of people, but it’s actually a big drop. In total, more than 8.5 million borrowers went into forbearance at some point during the Covid-19 pandemic, north of 15% of the total mortgage market.

Simple arithmetic suggests that nearly 8 million households that were abstaining are no longer abstaining. Temporary foreclosure protections also expired. That is to say, it is a real-time “stress test”, not only for borrowers, but also for lenders.

So what happened to this important group of owners and their families? Researchers at the Federal Reserve Bank of Philadelphia tracked this data and made some important discoveries.

Start with the positive.

The first piece of good news is obvious to anyone browsing the ads on


: The US real estate market is exceptionally strong. While this has undeniably had negative impacts on those seeking to enter the housing market, it ensures that most delinquent borrowers can avoid losing their homes and that banks will not suffer losses large enough to affect significantly their capital. Owners are sitting on more than $10 trillion in workable equity – a record. Other borrowers coming out of forbearance who are unable to resume payments likely have the opportunity to extract equity from their properties.

The contrast with the Great Recession is remarkable. Remember that at the time, nearly half of all troubled borrowers were “under water,” meaning they owed more on their mortgages than their homes were worth.

Additionally, to date nearly three-quarters of those who have come out of forbearance have voluntarily repaid or are current on their mortgages, with many resorting to payment deferrals or loan modifications. For borrowers able to resume payment in a timely manner, a deferral creates a second interest-free loan on their unexpired missed payments until the loan is repaid. This is important because missed payments during forbearance do not go away: borrowers will still have to repay them eventually. Adding them to the end of a primary loan is a smart way to ease that burden.

Loan modifications, on the other hand, work like a no-cost, cash refinance. Borrowers are offered lower rates and extended loan terms while being allowed to forgo immediate repayment of their outstanding arrears, resulting in a reduction in their monthly mortgage payments by 20% or more. Deferrals and loan modifications are the two main types of Covid-19 loss mitigation options on offer.

But many US borrowers continue to face heavy charges.

Nearly one million mortgages are seriously delinquent, split evenly between those classified by managers as in loss mitigation and those that are not. Most of the borrowers who remain seriously delinquent and unable to mitigate losses have never taken on forbearance and were in default before the pandemic hit.

And of borrowers classified as in loss mitigation, three-quarters are still in progress and have yet to resume timely payment of their mortgages. Burdens are not evenly distributed. Black and Hispanic borrowers have much higher nonpayment shares, either forbearing or defaulting.

Homelessness is a deeply destabilizing event with potentially permanent consequences. It’s also a heavy burden for lenders: foreclosures are expensive and take time to settle. Lenders should think hard about how to keep people in their homes and minimize their own losses.

One solution sought is for the Federal Housing Administration to offer 40-year terms for their modifications, as do the two government-sponsored companies,

Fannie Mae


Freddie Mac

do now. This would reduce the monthly mortgage payment even more than extending beyond the 30-year term currently offered, providing more relief to borrowers. The Department of Housing and Urban Development placed a proposed rule in the Federal Register on April 1 to increase the term of loan modifications to 40 years for FHA-insured mortgages. We are now in a 60 day comment period.

In the longer term, lenders should consider ways to improve communication with their customers. Our data suggests that millions of distressed borrowers who qualified for forbearances never took advantage of them. A study by my colleagues at the Federal Reserve Bank of Philadelphia found that millions of borrowers — disproportionately black or low-to-moderate income — did not apply to refinance their mortgages during the pandemic, when they could have benefit from significant savings. It was a missed opportunity.

With a fairly weak public social safety net for Americans, homes aren’t just our shelters — they’re also an important source of our household wealth and retirement savings. Let’s do what we can to make sure people don’t lose this vital asset.

Watch Philadelphia Fed President Patrick Harker on Barron’s Roundtable, which airs on Fox Business at 10 a.m. and 11:30 a.m. ET on Saturday, April 9 and Sunday, April 10.

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