Nonprime RMBS Modifications Trend Upward as Forbearance Recedes & Serious Delinquencies Drop Below a Key Benchmark

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Article Highlights:

Serious delinquencies in mortgage loans will require improving loss mitigation oversight. While 946,000 loans were in the 90+ day bucket as of December 2021, this is down from a high of 2,146,000 loans one year earlier. Pandemic-related economic stresses have lessened since the peak in 2020. We are not out of the woods yet, as the current numbers still show approximately double the number of seriously delinquent borrowers as pre-pandemic numbers.

Because Consumer Financial Protection Bureau foreclosure protections ended on January 1, 2022, we are likely to see an increased need for loss mitigation to assist borrowers in avoiding foreclosure. While some residents are still receiving government support from programs like The Homeowner Assistance Fund, many are no longer receiving any governmental assistance and will need loan modifications to remain in their homes. Some borrowers may be dealing with a pandemic-related drop in income since the home was purchased.

The Philadelphia Federal Reserve Bank stated in its most recent report that half of homeowners exiting government-sponsored forbearance plans have no loss mitigation plan in place. There are approximately 800,000 borrowers who are still in COVID-related forbearance plans, and more than half (63%) are scheduled to exit those plans in the first quarter of 2022. Those exiting both government-sponsored and COVID-related forbearance plans will need loss mitigation assistance to avoid losing their homes to foreclosure.

Since seriously delinquent loans act as a bellwether for mortgage backed securities and subprime borrowers in particular are the first to feel distress caused by macroeconomic changes, like those the pandemic brought, many institutions are watching these metrics closely as a forerunner of trends in the mortgage markets as a whole. A rise in loss mitigation for seriously delinquent and subprime mortgages may spell trouble for conforming mortgages down the line.

There are strong regulatory frameworks around loss mitigation.  Lenders and servicers will need, more than ever, to be compliant with those regulations. Failing to adhere to regulatory requirements in the current atmosphere of increasing scrutiny can be disastrous for any servicer. With loss mitigation efforts on the rise, servicers will need to improve their regulatory oversight.