Redefaults of COVID-era delinquent loans rise to 12%

While delinquency and forbearance rates are seemingly leveling off into a steady, familiar pattern following the expiration of COVID-19-related relief, some worrying signs have appeared in redefaults, with negative implications about the effectiveness of loan modifications.  

Among loans that went 90 days past due at some point during the pandemic — whether or not homeowners received federal forbearance relief — the redefault rate hit 12% following loss mitigation procedures as of Sept. 6, according to a report from the Federal Reserve Bank of Philadelphia. The share is up from 10% three months earlier.

While it was “encouraging that redefault rates have not spiked, as might be expected,” the rise “could be concerning” under what are considered favorable market conditions, analysts wrote in the report produced by the Risk Assessment, Data Analysis and Research Group of the Philadelphia Fed, which used data from Black Knight.  

But elevated consumer prices, which have posted annual increases of over 8% for the past six months, continue to take a bite out of household budgets this year. Rising mortgage rates have also driven negative consumer attitudes about the housing market and reduced the amount available for borrowers to apply to principal and interest.

While the rate of redefaults among mortgages guaranteed by the government-sponsored enterprises remained at 5% compared to the measure taken three months earlier, it increased across other investor types. Redefaults rose to 15% for loans backed by the Federal Housing Administration and Department of Veterans Affairs, compared to 12% in the June report. Portfolio loans recorded a 17% redefault rate, up from 16%. Meanwhile, private-label mortgage-backed securities, which include a large share of non-QM mortgages ineligible for federal related COVID forbearance relief, saw a 33% rate in redefaults, up from 31%. 

Approximately 1.9 million mortgages are currently delinquent or in forbearance as of Sept. 6, according to Black Knight, a similar number as in recent months. The total number of mortgages in forbearance stood at 470,969.

At the same time, loan-modification programs that are supposed to assist delinquent borrowers unable to resume regular payments are struggling to hit targeted principal and interest reductions for a majority of accounts.  

“With recent interest rate increases, average payment reductions have decreased significantly and are now below program targets for most borrowers,” the report said.

The FHA COVID-19 recovery modification for 30-year terms, which aimed to decrease principal and interest payments by 25%, is succeeding for only 8% in the program, with the average P&I reduction at 14%. The recovery modification extending the term to 40 years showed only marginally better results, with 9% of borrowers managing to reach the 25%-reduction goal, with average P&I decrease estimated at 15%.

Meanwhile, only 23% currently taking advantage of the GSE flex modification program, which aims to decrease P&I by 20%, are managing to hit the target, with the average reduction coming in at 17%. 

The 2022 acceleration of mortgage rates has largely caused the dropoff in average P&I reductions. Fewer accounts can meet targets after factoring in adjustments made for today’s higher rates, the report said. By comparison, the average P&I reduction for GSE flex modifications in December 2021 was 10 percentage points higher at 27%.