Mortgage

Pandemic loss mitigation had a 10% redefault charge in June

Early numbers suggest mortgages in COVID-19 loss mitigation programs will have a 10% redefault rate, according to the Federal Reserve Bank of Philadelphia’s Risk Assessment, Data Analysis and Research Group.

The group called the number “concerning given overall strong market conditions to date” and noted that it has varied widely depending on loan type.

Mortgages backed by government-sponsored enterprises Fannie Mae and Freddie had only a 5% redefault rate as of June 7, according to the report published Thursday. At the other end of the spectrum, home loans in private-label mortgage-backed securities had a 31% redefault rate. Loans the Federal Housing Administration insured or the Department of Veterans Affairs guaranteed have a 12% redefault rate. Portfolio loans had a 16% redefault rate.

Government-related loans generally were extended more standard and generous relief than private mortgages, although the latter market did pattern some of its loss mitigation after the former’s where possible. Contracts governing individual PL MBS deals in particular may restrict the type of loss mitigation that can be applied to loans included in them.

But even government-related loan modification programs may not be extending as much relief to borrowers with lingering distress due to recent rate hikes, the report noted, confirming previous findings.

The Philly Fed group found in an analysis of data from Black Knight’s widely used servicing system and Inside Mortgage Finance that the last two months that principal-and-interest reductions from “flex mods” at the GSEs have averaged 16% if they were subject to a standard 80% loan-to-value ratio constraint based on mark to market values. Only higher LTV mods exceeded the GSEs’ 20% target.

The savings achievable through the FHA’s “COVID-19 recovery mods” have averaged 15%, falling below its 25% target, according to new calculations the group began using to analyze the June data. The analysis was done based on the current market rate. Previously, the group had used the lower of the contract rate or the current market rate.

The amount of savings available through modifications ultimately will play a key role in determining the extent to which pandemic-related loss mitigation will be effective as a form of foreclosure prevention.

“Unless mortgage servicers can successfully execute home-retention options in the coming months, many borrowers face the prospect of selling their homes or losing them,” the Federal Reserve Bank of Philadelphia researchers said.

That said, the group noted that on an overall basis, the latest numbers show that “many borrowers have successfully come out of forbearance.”

Only 15% of the loans ever in forbearance appear to still be distressed, with the rest being paid off, performing or not immediately trackable because they’ve been subject to a servicing transfer. Seven percent of the distressed loans remain in forbearance, 5% are delinquent and not in loss mitigation, and 2% have late payments even though they have some form of relief such as a modification. The remaining 1% are in a trial modification but still delinquent.

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