This article foresees an increase in mortgage loan modifications following the impending expiry of the foreclosure moratoria, which in turn will lead to an increase in the number of defaulting borrowers.

Moratorium moratorium

After several extensions, the moratorium on foreclosures for federally guaranteed mortgages is due to expire July 31, 2021. This means that homeowners are currently behind on their mortgage payments – which have been overtaken by the Coronavirus Aid, Relief and Economic Security Act (CARES) adopted in March 2020 – you must either pay or apply for additional mortgage relief.

Under the CARES Law, homeowners were able to drastically reduce their mortgage payments – or skip them altogether – for up to twelve months. While homeowners still have to pay off payments they haven’t made, missed payments under this abstention program were not reported as delinquent and had no effect on owners’ credit reports.

Owners do not subject to mortgage forbearance during the recession in fact have until September 30 request an additional abstention for a maximum of six months. Anyone currently on a forbearance program who is not making mortgage payments is also lucky – they can apply for a three month extension of their mortgage. abstention.

For those who are more than 90 days late on their mortgage payments, however, there is another option: mortgage modification.

Changes on the horizon

the Federal Housing Administration (FHA) offers the COVID-19 (COVID-19 ALM) Advance Loan Modification for seriously overdue homeowners.

Rather than anticipating mortgage payments for a given period, mortgage modification changes the basic terms of a mortgage loan, allowing homeowners in default or imminent to default to catch up on more manageable terms.

the Federal Housing Finance Agency (FHFA) nominally reports, less mortgage payments were in arrears in 2020 than in 2019. At first glance, it may seem that fewer homeowners actually need the relief from mortgage modifications. However, the data is misleading. Since the late payments of overdue mortgages under the CARES Act have not been reported as past due, the FHFA estimates that the arrears rates could be more than 3% higher than those actually reported. , a strong increase compared to previous years.

As a result, we are likely to see a wave of homeowners asking for relief in the form of mortgage modifications. What makes this alarming is that the next increase in mortgage modifications coincides with the fact that employment in California is still down 1.4 million jobs from before the recession of 2020.

Without access to a reliable source of income, many homeowners who currently rely on CARES law mortgage relief head into default once that relief runs out – which, for those who opt for the COVID program – 19 FHA ALM, means an increase to come. default changes.

The story repeats itself

It’s easy to forget we’ve been here before – in the years after the Great Recession, a similar federal mortgage modification program generated a whopping 60% nationwide. redefine default only one year after the changes come into force.

Changes have been canceled by the thousands in the first half of 2010 due to delinquent homeowners who, despite having accepted modified mortgage terms, were unable to cope with the modified payments.

At the time, the modification was a short term solution for the underlying bad mortgages problem, and there is a slim chance that the next increase in defaults will match the extremes of the consequences of the Great Recession – today’s housing market is not the market. of 2009. Home prices are still on the rise, which means homeowners who have accumulated enough equity can simply make the decision to sell to avoid foreclosure.

However, the change will be the more prudent choice for many others who are struggling to pay off delinquent mortgages, and as California continues its resumption of precarious jobs, more homeowners will be able to afford mortgage payments. who may have fallen behind in recent months.

Ultimately, it’s hard to say exactly how many homeowners are heading for default or foreclosure. Even though arrears rates remain low, the percentage of homeowners withholding predictably has strongly increased since the onset of the recession – indicating an increase in forbearance extensions and mortgage modifications after the federal moratorium on foreclosures ends.

While the re-default rate is unlikely to be as high this time around, the current weak job growth means that homeowners are still suffering from the effects of the recession and pandemic, and so on. years to come. Mortgage modification is still only a short-term solution that is not as effective as homeowners the ability to pay.

Unemployed, employees have no financial capacity make mortgage payments, which means the government is spending Job creation is the best real long term solution to keeping homeowners in their homes. And make no mistake – for those who accept the FHA’s offer of federal mortgage modification, a wave of delinquent borrowers is looming on the horizon.