Should the federal government start guaranteeing mortgages even longer than 30 years? Federal Reserve Bank of Philadelphia President Patrick Harker thinks this could be a solution to an emerging problem in the housing finance ecosystem.
In a speech where Harker called on the central bank to act more aggressively in fighting inflation, he also focused on developments in the housing market.
“In general, the housing market is largely healthy; if anything, it’s not meeting demand,” Harker said Tuesday.
A potential problem on the horizon, however, is the large number of Americans who are behind on their mortgage payments. And that’s where the 40-year mortgage can come in.
The Philadelphia Fed has been monitoring developments regarding mortgage forbearance. Early in the pandemic, lawmakers demanded that borrowers whose home loans were federally insured be allowed to suspend payments amid the economic turmoil. Through the CARES Act, lawmakers also established a moratorium on foreclosures. For loans not guaranteed by the federal government, private lenders largely adopted the same policies – although some shortcomings existed.
In total, more than 8.5 million borrowers have taken out mortgage forbearance at some point during the pandemic, representing more than 15% of the country’s mortgage market. Today, that figure is down to just 680,000 mortgages, down about 90%.
“The number of homeowners in forbearance on their mortgage has fallen 90% since the 2020 peak.”
“Nearly three-quarters of those who dropped out of forbearance have paid or are performing, with many using payment deferrals or loan modifications,” Harker said.
Still, nearly a million mortgages are seriously delinquent, only half of them under loss mitigation programs, Harker said. (Loss mitigation may include forbearance, loan modification, and other options.) Many borrowers who did not take advantage of loss mitigation options never entered forbearance and were in default. delay on mortgage payments even before the COVID-19 pandemic. Black and Hispanic borrowers currently have higher shares of mortgage nonpayment, Harker noted, either because they are forbearance or because they are behind on their loan.
While the housing market is by no means facing a foreclosure crisis given the scale of what happened around the Great Recession, many homeowners are in dire straits. “Interestingly, just as the unemployment rate has returned to pre-pandemic levels, the number of delinquent mortgages has also returned to pre-pandemic rates,” Harker said. Notably, the national moratorium on foreclosures expired at the end of 2021.
Lenders, Harker noted, could consider solutions that would limit loan modification costs while providing borrowers with payment relief. And he pointed to 40-year mortgages, particularly from the Federal Housing Administration, as one such solution.
The government failed to deliver on its 40-year loan promise
Last year, Ginnie Mae, the state-owned company that insures mortgages created under programs run by the FHA, the Department of Veterans Affairs, and the U.S. Department of Agriculture, announced it would begin support the securitization of loans with terms up to 40 years. . But as Harker pointed out, while the Department of Housing and Urban Development offered to facilitate a 40-year mortgage, “that has yet to materialize.” A draft of such a new policy was distributed last fall, but a final version was never distributed.
The Ginnie Mae program, if rolled out, would allow lenders to offer loan modifications to borrowers with a 30-year mortgage that extend the term of their loans. By doing so, borrowers could lower their monthly payment, which could make it easier for homeowners to manage ongoing payments as they recover from pandemic-related financial difficulties.
Freddie Mac FMCC,
and Fannie Mae FNMA,
already support loan modifications up to 40 years through their “Flex Modification” programs.
Having access to a 40-year loan can be essential for many homeowners with FHA, USDA, and VA loans. Throughout the pandemic, these mortgage borrowers were more likely to be forgiving than people with loans backed by Fannie Mae and Freddie Mac. FHA, VA, and USDA loans come with less stringent credit score and down payment requirements, making them more popular with less affluent homebuyers.
A 40-year mortgage could be a risky proposition
While Harker’s comments only pointed out that 40-year mortgages were a useful tool to help struggling homeowners get back on track, the 40-year mortgage modification program could serve as a testing ground. for the overall popularity of the product.
“Whether or not this is viable will ultimately depend on investor demand – and that may change with the wind,” said Greg McBride, chief financial analyst for Bankrate.com.
If investors were to be receptive to loan-backed securities that originally had shorter tenors but later changed to 40-year mortgages, this could be taken as an indication that they would support such a product if lenders were offering it to homebuyers and people were refinancing outright. As investors grease the wheels of the mortgage market, their opinion carries a lot of weight.
But as McBride notes, a 40-year mortgage is far from foolproof, especially given the situation in the current market cycle. Home prices are very high across most of the country, and many economists expect the pace of home price growth to slow as mortgage rates rise.
So far, the rapid pace of home price appreciation has benefited struggling homeowners. Families behind on their mortgages could count on selling their homes and benefiting from increased equity. But with a 40-year mortgage, homeowners would be accumulating equity at a snail’s pace — even slower in a market where house price growth is slowing.
This not only has implications for borrowers “in terms of the capital you build, but also whether or not you have enough capital to pay transaction costs,” McBride said.