In case you missed the financial crisis a decade ago, lenders rolled out home mortgage modifications to help delinquent homeowners avoid foreclosure on their homes. In addition to stretching out amortization periods, reducing interest rates and the amount of principal owned, lenders tacked on delinquent interest rates to outstanding principal and interest rates owed.
The Hope Now consortium, an initiative of the Robert Wood Johnson Foundation to help delinquent modified mortgage holders, estimated there are some 8.7M permanent mortgage modifications implemented since the end of 2007. (Hope Now is the major source for modification data.) These 8.7M do NOT include other temporary fixes that lenders have created.
These temporary fixes, some 17M of them, include two important ones: forbearances and repayment plans that temporarily defer or reduce payments until modified mortgage holders “get back on their feet” and can pay all of their delinquent fees.
Now the mortgage market has re-defaultness (delinquent defaulted mortgages that have been re- or twice defaulted delinquent mortgages) in its mix. In fact, Fannie Mae recently reported in its Financial Supplement that the 12-month re-default rate has climbed to 39%. Not only has its re-default rate climbed to 39%, Fitch Ratings indicates that the re-default rate for Fannie Mae loans modified three or more years could now be approaching 50%!
JP Morgan, the second largest holder of residential mortgages in the country, showed nearly $10B of modified loans in its Q2 2019 earnings report. Of those $10B modified loans, 43% were listed as having re-defaulted.
Bank of America indicated that 41% of its modified loans have re-defaulted.
According to the Securities Industry and Financial Markets Association (SIFMA), there are modified loans to the tune of some $819B that are currently outstanding.
So now what? Looking at a 2008 mortgage on an original loan of $400,000 that was modified in 2015 and has been delinquent for years, the interest arrears total some $127,766. The new amount on the modified loan came to $515,000. The terms of the loan were stretched out to 40 years so the new monthly payment came to $2,879/month. The new loan is to finally mature in 2055.
Really? What are the chances of this all happening particularly as home prices continue to weaken? Would it make any sense for a re-defaulter to continue to pay their modified mortgage payment?
Who is going to figure out how/when to fill this crack in the mortgage market and, by the way, what will home prices look like if/when this crack is filled?
Thanks to Keith Jurow of Barron’s for source data.