This article forecasts a surge in mortgage modifications in the wake of the coming expiration of foreclosure moratoriums — which will in turn lead to a rise in re-defaulting borrowers.

Moratorium moratorium

After several extensions, the foreclosure moratorium for federally-backed mortgages is set to expire on July 31, 2021. This means homeowners currently behind on their mortgage payments — which were forestalled by the Coronavirus Aid, Relief, and Economic Security (CARES) Act passed in March 2020 — either need to pay up or apply for additional mortgage relief.

Under the CARES Act, homeowners were able to significantly reduce their mortgage payments — or skip them entirely — for up to twelve months. While homeowners are still on the hook for any payments they didn’t make, missed payments under this forbearance program were not reported as delinquent and had no effect on homeowners’ credit reports.

Homeowners not subject to any mortgage forbearance during the course of the recession actually have until September 30 to apply for additional forbearance lasting up to six months. Anyone currently in a forbearance program and not making mortgage payments is in luck, as well — they may apply for a three-month extension on their forbearance.

For those more than 90 days delinquent on their mortgage payments, however, there’s another option — mortgage modification.

Modifications on the horizon

The Federal Housing Administration (FHA) is offering COVID-19 Advance Loan Modification (COVID-19 ALM) for seriously behind homeowners.

Rather than forestalling mortgage payments for a set period of time, mortgage modification alters the base terms of a mortgage, allowing homeowners who are in default or for whom default is imminent the chance to catch up under more manageable terms.

The Federal Housing Finance Agency (FHFA) reports that nominally, fewer mortgage payments were delinquent in 2020 than in 2019. On its face, this may sound like fewer homeowners actually need the relief of mortgage modifications. However, the data is misleading. Since late payments for mortgages in forbearance as part of the CARES Act were not reported as delinquent, the FHFA estimates that past-due rates could be more than 3% higher than actually reported — a steep increase from previous years.

As a result, it’s likely we could be staring down a wave of homeowners applying for relief in the form of mortgage modifications. What makes this alarming is that the soon-to-be rise in mortgage modifications coincides with the reality that California employment is still down 1.4 million jobs compared to before the 2020 recession.

Without access to a reliable source of income, many homeowners currently relying on CARES Act mortgage relief are headed for default once that relief runs dry — which, for those who opt into the FHA’s COVID-19 ALM program, means a coming surge in modification defaults.

History repeats

It’s easy to forget we’ve been here before — in the years after the Great Recession, a similar federal mortgage modification program yielded a whopping 60% national re-default rate just one year after the modifications went into effect.

Modifications were canceled by the thousands in the first half of 2010 as a result of delinquent homeowners who, despite having agreed to altered mortgage terms, were unable to keep up with the modified payments.

At the time, modification was a short-term solution for the underlying issue of rotten mortgages, and there’s a slim chance the coming surge in re-defaults will match the extremes of the Great Recession’s aftermath — the housing market of today is not the market of 2009. Home prices are still up, which means homeowners who have built enough equity may simply make the decision to sell to avoid foreclosure.

However, modification will be the most prudent choice for plenty of others struggling to repay delinquent mortgages, and as California continues its scraggly jobs recovery, more homeowners will be able to afford mortgage payments that may have lagged in recent months.

Ultimately, it’s hard to say exactly how many homeowners are headed toward default or foreclosure. Even as past-due rates remain low, the percentage of homeowners in forbearance has predictably risen sharply since the start of the recession — pointing to a spike in forbearance extensions and mortgage modifications once the federal foreclosure moratorium is over.

While it’s unlikely the re-default rate will be as high this time around, the current sluggish jobs growth means homeowners are still hurting from the effects of the recession and the pandemic, and will be for years to come. Mortgage modification is still only a short-term solution that’s only as effective as homeowners’ ability to pay.

Without jobs, wage earners have no financial ability to make mortgage payments — which means government spending on job creation is the best real long-term solution to keep homeowners in their homes. And make no mistake — for those who take the FHA’s offer of federal mortgage modification, a spate of re-defaulting borrowers is on the horizon.