A report titled Government Loan Modifications: What Happens When Interest Rates Rise?, released by the Urban Institute’s Housing Finance Policy Center (HPFC) is the second in a series of three briefs being published by the HPFC in association with the Mortgage Servicing Collaborative (MSC). The report examined the government loan modification products insured by the Federal Housing Administration (FHA), Department of Veteran Affairs (VA), or the US Department of Agriculture (USDA). It also explored how FHA, VA, and USDA borrowers who fall behind on their payments are unlikely to receive adequate payment relief when the market interest rate is higher than the original note rate.
The report, covered a spectrum of topics such as the current loan modification suite for government mortgage loans; why government loan modifications do not serve borrowers when interest rates rise; potential solutions and recommendations for expanding the loss mitigation toolkit; and likely barriers to implementation and how best to overcome them.
In its introduction, the report explained how government loan modifications in a rising rate environment made providing payment reduction more expensive and challenging, which in turn made it more difficult to cure delinquency resulting in more re-defaults and foreclosures, larger losses for government insurers, and greater distress for borrowers, communities, and neighborhoods. Additionally, the report noted that most government mortgage borrowers were first-time homebuyers and minorities, who usually had limited incomes and savings, making loan modifications all the more important.
Arguing that with some changes to loan modification options at the FHA, VA, and USDA current and future delinquent borrowers could be better served in a high rate environment, the report recommended options such as modifying mortgages within the pool to eliminate re-pooling for FHA and USDA, and principal forbearance for the FHA, VA and USDA, which could increase payment relief.
The report noted that these options would produce the largest payment reduction at the lowest cost, while the amount of payment relief could be increased by offering borrowers a Mortgage Insurance Premium reduction.
To read the complete report click here.