What is the next step for borrowers who have abstained? -Liberty Street Economics
Editor’s Note: When this article was first published, the average credit score increase for mortgage borrowers who abstained was inaccurate; the message has been corrected to reflect the correct 14 point number. (May 19, 1 p.m.)
We’ve spent the first three articles in this series discussing who has adopted mortgage forbearance and how their personal finances have evolved during the pandemic. In this fourth and final article, we will use data from the Consumer Credit Panel (CCP) to examine the profiles of those who remain in forbearance and those who have exited, and how household credit performance may change as the The strength of the pandemic begins to ebb and the economy reopens and normalizes.
Almost two-thirds of tolerance participants have left tolerance by March 2021
Many mortgage borrowers have gone into and out of forbearance during the pandemic, and we find that 13% of all mortgage borrowers have been on hold for at least a month in the past year and 35% of these participants were still in abstention in March. 2021.
Abstentions from the CARES Act were initially allowed for a six-month abstention, with twelve months of additional extensions. So far, the average participant has spent five months in forbearance, but as we show in the graph below, a third of participants were in forbearance for only one to two months, and twelve percent of borrowers took advantage of the maximum possible tolerance of eleven. at twelve months.
Many borrowers came out of forbearance by selling their property, with the benefit of home equity at an all-time high in nominal terms, according to the United States financial accounts. This escape route was not available to distressed borrowers during the Great Recession, when a collapse in home prices left a foreclosure or short sale as the only potential exits from an underwater mortgage. The orange sections of the bars below indicate borrowers who have abstained for that number of months, but have since prepaid their mortgages – likely by moving or refinancing. Note, however, that refinancing may have been a more likely option among those with shorter hold times due to agency requirements (FHA, Fannie, Freddie).
Low-income borrowers are more likely to stick around
As we discussed in the first article in this series, borrowers living in low-income areas were more likely to have already adopted a forbearance, with almost 16 percent of those mortgage borrowers having adopted a forbearance at some point. given. In contrast, in the regions with the highest incomes, 11% of mortgages had participated in an abstention. Across all groups, around one-third of mortgages remained in abstention as of March 2021.
Borrowers with the highest prepandemic credit scores were the least likely to abstain, while nearly 30 percent of low-credit mortgage borrowers adopted mortgage forbearance at some point during the l past year. And more than half of them remained in abstention in March 2021, while only a quarter of the best performing borrowers were still in abstention.
Increase in the credit rating of forbearers
With forbearance protecting borrowers from damaging delinquencies due to missed payments, average credit scores have risen faster over the past year – a phenomenon we see in our data (using Equifax risk scores ).
Most mortgage borrowers who have forborne have seen their credit scores increase since March 2020 – in fact, the average credit score has increased by 14 points since then. But the increases are larger at the lower end of the credit score distribution, with subprime mortgages scoring below 620 seeing a 57 point increase in their scores over the past year, on average. Those who never abstained during the pandemic have also seen their credit scores increase – by 7 points – as a longer payment history helps increase a borrower’s creditworthiness. Interestingly, the credit rating increase is highest among forbearance takers. This is because even if they are not making payments, their credit reports are treated as if they are making ongoing payments for credit scoring and account history purposes. A regular payment history provides a boost, especially for those who started out with a lower credit score and whose reports may have already been plagued by missed payments. So, in the end, this brings up two messages: On the one hand, it is good for forbearers not to suffer in terms of credit score from missed payments. On the flip side, the concept of credit score, a way to distinguish good borrowers from bad borrowers, may lose some of its power in reporting creditworthiness to lenders, at least for a while.
What to expect for those who remain indulgent
In March 2021, the characteristics of borrowers who remain in forbearance were significantly different from what they had been twelve or even six months earlier. Many of the more “advantaged” forbearers – those who are more likely to have opted out with a higher credit rating or non-delinquent mortgage status – are already gone. The remaining pool of forborne borrowers is almost certainly more vulnerable to delinquency after the forbearance programs are terminated. One manifestation of this is that their payout rate is lower than the payout rate of those who came out of forbearance more quickly. As a result, in March, more than 70% of borrowers withheld were not making payments, a higher share than any month in 2020.
A simple and prudent way to think about how the end of forbearance might play out from a risk perspective is to assume that borrowers who fail to make payments will be at serious risk of defaulting on their payments. the end of the program. This represents around 2.9% of all mortgage borrowers, suggesting that the severe default rate could reach around 3.8%, up from 0.9% currently and well above the pre-pandemic rate of around 1. , 3%. Of course, not all of these borrowers will fall into serious delinquency, especially those who are forborne with non-past due accounts, even though they are not currently making payments. And other borrowers may fall into default without abstaining, especially if house prices fall and / or the current economic recovery weakens. Nonetheless, from where we are now, it seems unlikely that the end of mortgage forbearance was associated with more than 6 percent of mortgages becoming 90 days or more late, as happened during the Great Recession. .
Amid high unemployment rates and other types of household distress, consumer default rates have been low and declining as economic policies have targeted households at potential risk. Distressed borrowers have had their credit reports protected from damage, while forbearance has brought payment flexibility and cash flow relief to households and business owners who have been affected by the pandemic. Of course, these programs have come at a cost to investors and mortgage managers, and they may also have made credit scores less informative. Nonetheless, their success in keeping borrowers out of delinquency stands in stark contrast to the experience of the Great Recession – when ever-increasing delinquencies and consumer foreclosures were both a driver of the financial crisis and then, in a circle. vicious, a consequence of the financial crisis. crisis, as house prices fell and nearly 12 million Americans were foreclosed. This time around, foreclosures have all but ceased, put on hold as a measure of consumer relief through the CARES Act, and the negative impact of the jump in mortgage payments has been muted on credit reports. How well borrowers who have benefited from forbearance over the past year recover will depend on many factors, as economic conditions and policy responses evolve.
Andrew Haughwout is Senior Vice President of the Research and Statistics Group at the Federal Reserve Bank of New York.
Donghoon Lee is a member of the Bank’s Research and Statistics Group.
Joelle Scally is a Senior Data Strategist in the Bank’s Research and Statistics group.
Wilbert van der Klaauw is Senior Vice President of the Bank’s Research and Statistics Group.
How to cite this article:
Andrew F. Haughwout, Donghoon Lee, Joelle Scally and Wilbert van der Klaauw, “What’s Next for Forborne Borrowers?”, Federal Reserve Bank of New York Liberty Street Economy, May 19, 2021, https://libertystreeteconomics.newyorkfed.org/2021/05/whats-next-for-forborne-borrowers.html
Additional articles in this series
Keep borrowers informed of a pandemic
What happens when the mortgage is forbidden?
Small business owners turn to personal credit
Economic inequalities: a series of research
The opinions expressed in this post are those of the authors and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the authors.