Will Mortgage Distress Climb When Forbearance Ends?

Key Highlights

• Industry experts forecasting that mortgage distress will rise but not to “sky-high” levels when forbearance ends
• Analysis highlights plight of low-income homeowners

Anticipation There “Still Going To Be Struggling”

Researchers at the Federal Reserve Bank of New York underlined that low-income homeowners and those with low credit scores will remain “more vulnerable” once the mortgage forbearance program expires.

Wilbert van der Klaauw, senior vice president with the NY Fed, said, “We anticipate that they are still going to be struggling.”

Correlation Between Credit Scores and Forbearance Participatio

Take a look at the comparisons of how credit scores have influenced forbearance participation levels during the pandemic and in March 2021:

• Under 620
  • 29% in forbearance at some point
  • 16% in forbearance in March 2021
• 620 and 659
  • 20% in forbearance at some point
  • 9% in forbearance in March 2021
• 660 and 719
  • 16% in forbearance at some point
  • 6% in forbearance in March 2021
• 720 and 759
  • 12% in forbearance at some point
  • 4% in forbearance in March 2021
• 760+
  • 8% in forbearance at some point
  • 2% in forbearance in March 2021

Factors Likely to Affect Rise of Late-Payment Rates

Several factors will likely determine the rise of late-payment rates once forbearance ends.  Those factors include, according to van der Klaauw: 

• Progress of US economic recovery
• Whether or not housing prices fall in coming months
• Whether or not mortgage servicers give struggling borrowers more flexibility while exiting forbearance

Rough Estimate of Serious Delinquencies – 3.8%

The New York Fed estimates that serious delinquencies (mortgage borrowers who are at least 90 days late in their payments) could run as high as 3.8% once forbearance ends.   Remember that serious or late-stage delinquency often precedes foreclosure.

The good news is that, currently, it seems “improbable” serious delinquency rates will be as high as the more than 6% levels hit after the 2008-09 crisis.

Non-Mortgage Delinquencies Up to 5.8% in March 2021

Borrowers who have participated in mortgage forbearance during the pandemic have also become delinquent on non-housing debt such as auto and/or credit card debt.

That non-mortgage delinquency rate rose to 5.8% in March.

Clearly, many borrowers prioritized or chose to pay their mortgage loans over their other loans.

Matt Komos, vice president of research and consulting with TransUnion,said, “…we’ve seen that the mortgage loan has become a priority…For many consumers, their home has become their home office or become a safe haven through the pandemic.”

Researchers with the New York Fed believe that non-mortgage delinquencies would have been much higher than 5.8% without the freed-up cash made available to mortgage borrowers via the forbearance program.

Thanks to National Mortgage News.

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