New reports show that the strategies used by three major government-backed mortgage agencies to help delinquent borrowers keep their homes make financial sense for the entities themselves.
Fannie Mae, Freddie Mac and the Federal Housing Administration save billions of dollars over time by giving loans a chance to reperform, Housing Risk and Policy Advisors found in an analysis of data from sources that included Recursion.
The study the Housing Policy Council published could play a role in how policymakers view these entities' investments in distressed servicing strategies as officials
How the costs of disposition and retention compare
"Home retention alternatives are not free for mortgage guarantors by any measure. However retention programs are designed to minimize the losses," HRPA President Khanav Bhagat noted in one of the two new reports.
An analysis based on Department of Housing and Urban Development data for a two-decade period that included the Great Financial Crisis suggests home retention saved the FHA $23.2 billion on a net basis after expenses.
"The resulting reduction in post-intervention default rates and subsequent dispositions more than offset the cost of providing the intervention," Bhagat said in the report.
A separate paper devoted solely to Fannie and Freddie estimates the average cost of a disposition is $43,337 per seriously delinquent loan, resulting in net savings of $18,670. When compared to a market-rate loan modification, which costs $38,933, the net savings is $14,266.
This also adds up to billions of dollars in savings that grow exponentially during periods like the GFC when distress is more widespread, according to that study.
"At today's low rates of
Exceptions to the rule and getting rate relief right
"The savings created by the GSE home retention programs relative to dispositions and market-rate modifications persist unless the mortgage rate quickly rises above 9.5% or loss severity averages a historically low 9%," Bhagat wrote
The loss severity scenario is "unlikely," according to the study, which notes that even during a period when home price appreciation is robust as it was between 2018 and 2024, loss severity was much higher at an average 28%.
But ensuring home retention strategies work in all interest rate environments, which Bhagat suggests as a best practice in his broader paper, can be tricky as highlighted by
The sweet spot where rate cuts maximize reperformance based on their impact on borrowers' monthly obligations should be the goal in designing strategies that work in a broad range of markets, according to the report.
"Analysis suggests that payment reductions of between 20% and 30% are optimal — payment reductions of less than 20% are often insufficient to reduce redefault rates, while payment reductions beyond 30% have little marginal impact," Bhagat said.
