The number of loans in forbearance increased in June for the first time since late 2022, according to the Mortgage Bankers Association (MBA), which concurrently released a study to help mitigate the sudden rise in defaulting borrowers and its impact on the industry.
The MBA’s Research Institute for Housing America (RIHA) just published “Mortgage Design, Underwriting, and Interventions: Promoting Sustainable Homeownership.” In it, analysts examined current mortgage design models, underwriting standards, and intervention policies that may alleviate market pressures resulting from high levels of mortgage defaults.
"The study's findings can help the industry identify current issues impacting overall housing sustainability and how to prep for future housing downturns," said Edward Seiler, executive director of the RIHA and MBA's associate vice president, Housing Economics. "Creating solutions for distressed borrowers will greatly improve the efficiency in the housing market as well as provide additional ways to make sure distressed borrowers stay in their homes."
Mortgage forbearance, which allows borrowers in financial hardship to pause mortgage payments for up to six months, rose by 0.23% in June, impacting approximately 115,000 homeowners. This is the first increase in forbearances since October 2022, pointed out MBA’s Vice President of Industry Analysis, Marina Walsh.
“Furthermore, the performance of both loan workouts and overall servicing portfolios weakened, particularly for government loans,” Walsh said. “There were several factors that caused the forbearance rate to rise in June, including the uptick of severe weather events that hit multiple regions of the country as well as early signs of consumer distress that could potentially impact borrowers’ ability to pay their mortgages. Additionally, June’s month-end fell on a Sunday, and the weekend timing typically leads to higher mortgage defaults in any given month.”
MBA’s research identified three basic situations that lead to mortgage default: borrowers who have negative equity and choose to default despite an ability to pay their mortgage; borrowers unable to pay their mortgage due to a liquidity shock – income or payment – who cannot sell their home due to negative equity; and, borrowers facing liquidity shock who choose not to sell even though they have positive equity.
The RIHA study focuses on lessons learned from the Great Financial Crisis of 2008 and the recent COVID-19 pandemic, with an aim to plan ahead for future periods of housing market stress.
Dr. Joseph Tracy, a distinguished fellow at Purdue University and former senior advisor to the Federal Reserve, noted that the industry was ill-prepared to handle the sharp rise in loan defaults during those tumultuous times.
"The industry must continue to evolve with the changing dynamics of its customers and their needs,” Tracy said. “By examining current mortgage design and underwriting standards, the industry will be better equipped to assist distressed borrowers facing hardships. Refocusing on sustainability will ensure that future gains in the homeownership rate are enduring and that households are more likely to attain their aspiration of one day owning their home debt free."
The RIHA is a 501(c)(3) trust fund set up by the MBA to broaden knowledge of mortgage banking through grants to distinguished scholars and subject matter experts, educational institutions, research facilities, and government organizations.
Two key strategies for helping distressed borrowers are to mitigate any cash-flow constraints and to deleverage the borrower, according to its latest research.
Donna Schmidt, managing director of DLS Servicing, said that her company has seen a significant increase in the number of borrowers requesting forbearance due to loss of jobs.
“The inflationary pressures with lack of wage growth, added to increased credit debt that is catching up with many households is leading to delinquencies,” Schmidt said.
