New Aid Coming for Mortgage Borrowers at Risk of Foreclosure
Borrowers who fell behind on their mortgages during the Covid-19 pandemic and continue to face economic hardship will get help from a Biden administration program announced on Friday, a bid to prevent a sharp rise in foreclosures over the coming months.
The program would allow borrowers with loans backed by the Federal Housing Administration and other federal agencies to extend the length of their mortgages, locking in lower monthly principal and interest payments. About 75% of new home loans are backed by the federal government, according to the Urban Institute.
Friday’s changes are aimed at homeowners who took advantage of so-called forbearance programs that allowed them to skip monthly payments for up to 18 months, but who can’t resume making those normal payments as that relief begins to expire.
Adding new modification options for struggling homeowners is “an important additional step to give people the opportunity to stay in their homes after they had a hardship during the pandemic,” said Bob Broeksmit, president and chief executive of the Mortgage Bankers Association.
About 1.55 million homeowners are seriously delinquent—meaning they haven’t made mortgage payments in at least 90 days, according to the mortgage-data firm Black Knight Inc. These borrowers, the bulk of whom have forbearance plans, may be most at risk of foreclosure in the coming months. They represent about 2.9% of the 53 million active mortgages, down from a high of about 4.4% in August and September 2020.
Borrowers who entered into forbearance plans early in the pandemic will begin to exit those plans in September and October, when Black Knight forecasts that about a million borrowers will still be seriously delinquent. Meanwhile, a national foreclosure ban is set to expire July 31.
Friday’s changes are the latest move by the Biden administration to prevent a repeat of the wave of foreclosures that followed the 2008-09 financial crisis. The Consumer Financial Protection Bureau last month completed rules that restrict mortgage lenders from foreclosing on a property this year without first contacting homeowners to see if they qualify for a lower interest rate or some other loan change that makes it easier to repay.
The changes aim to reduce monthly payments by up to about 25%, an administration official said, adding they are designed to align with modification options already offered by Fannie Mae and Freddie Mac, the government-controlled mortgage companies.
“If a reduction in monthly costs helps keep that borrower in their home until they are back on their feet, then it is a win for the borrower, policy makers, and Uncle Sam, as he owns the credit risk,” said Isaac Boltansky, director of policy research at Compass Point Research & Trading, which serves large institutional investors.
Many of the borrowers who are still postponing payments have FHA loans and typically have lower incomes and make smaller down payments than people with other government-backed loans, such as those guaranteed by Fannie Mae and Freddie Mac. Job losses during the pandemic have disproportionately affected low-wage workers, including employees of restaurants, hotels and shopping malls devastated by the stay-at-home economy.
Research since the 2008-09 financial crisis has found that deferring mortgage payments, reducing interest rates or extending the term of mortgages—and thus reducing the monthly payments—are effective ways to aid homeowners short on cash.