Loan mods more than doubled in Q1, narrowing gap with deferrals

Loan modification numbers at government-sponsored enterprises Fannie Mae and Freddie Mac expanded notably in the first quarter, confirming other recent studies that suggest the use of this workout option is trending upward.

The number of loans completing this type of workout more than doubled during the period, rising to 41,375 from 16,913 the previous quarter in line with expectations that borrowers with later exits from pandemic-related forbearance would be more likely to have lingering hardships.

That brings the number of completed mods, which are designed to lower payments for borrowers with long-term reductions in income, closer to rivaling deferrals, which are used by homeowners who can afford to resume regular payments. Deferrals set aside forborne amounts for later payment. Completed deferrals dropped to 58,134 in the first quarter from 102,700 during the previous three-month period, according to the Federal Housing Finance Agency’s latest report.

The amount of savings obtained by distressed borrowers with modifications was generally more than 20% in the first quarter, in line with program goals, the FHFA found. Three-quarters of completed mods reduced monthly obligations by this amount.

However, high rates are making it tougher for borrowers to obtain lower payments. Refinances during the first quarter dropped to 899,518 from almost 1.27 million during the same time period, according to the FHFA report published Tuesday.

Although the FHFA has not yet released its second quarter numbers, another study shows that the average amount of savings available from certain modification options offered is shrinking. Principal-and-interest savings available from the GSEs’ “flex mod” program averaged just 16% as of mid-May, compared to 27% in December, recent research by the Federal Reserve Bank of Philadelphia shows.

While workout options like modifications have kept a growing number of distressed borrowers in their homes, foreclosure starts — which are returning to a more normal environment after being artificially constrained by pandemic-related relief programs — tripled in 1Q22.

The foreclosure start count was 20,624 by the end of the first quarter of this year, compared to 6,178 in the last three months of 2021.

Short sales or deed-in-lieu actions fell to 240 from 308 between the fourth quarter of last year and the first three months of 2022. These are home forfeitures exercised by borrowers who can’t continue to make loan payments but do not go through the foreclosure process.

Several foreclosure prevention initiatives have been available to address pandemic hardships and provide social benefits; but as those programs have aged, experts have begun to look at whether continuing them is constructive for the market or not.

“You make the loan because, if it's not repaid, you can seize the asset and make yourself whole or reclaim a part of your investment; but if that is systematically altered, does it change the risk metrics and increase or decrease the amount of lending?” Fannie Mae Chief Economist Doug Duncan said in a recent interview. “It’s a question.”