What GAO Found
Many single-family mortgage borrowers who missed payments during the pandemic have used the extended CARES mortgage waiver clause. This provision allowed borrowers with loans, insured, guaranteed, made directly, bought or securitized by federal entities (about 75 percent of all mortgages), to temporarily suspend their monthly mortgage payments. The use of the abstinence clause peaked in May 2020 and accounted for about 7 percent of all single-family mortgages (about 3.4 million) and gradually declined to about 5 percent, according to an analysis of the National Mortgage Database by the Financial Supervision Authority. by February 2021. As of February 2021, about half of all borrowers who showed patience during the pandemic remained patient. In addition, black and Hispanic borrowers, who are more likely to be hit by the pandemic, have shown patience about twice as much as white borrowers. Restraint was also more common among borrowers with an increased risk of default on mortgages – in particular, first-time minority homebuyers as well as low- and middle-income homebuyers with mortgages insured by the Federal Housing Administration and rural homebuyers with loans guaranteed by the Rural Housing Service. construction. (see fig. 1).
Figure 1: Estimated Percentage of Single Family Mortgages in Tolerance by Loan Type (Jan 2020 – Feb 2021)
A small percentage of borrowers who missed payments during the pandemic showed no leniency – less than 1 percent of the number of borrowers covered by the CARES Act. However, borrowers who have not used leniency may be at greater risk of default and foreclosure, according to the GAO’s analysis of the National Mortgage Database. For example, these borrowers tended to have lower subprime credit ratings, indicating an increased risk of default compared to borrowers who were current or patient, who tended to have a higher principal or close to the first credit rating. Federal agencies and state-sponsored businesses Fannie Mae and Freddie Mac (businesses) have taken steps to educate these borrowers about abstinence options, such as through direct phone calls and letters. In addition, the Consumer Financial Protection Bureau (CFPB) amended its mortgage servicing rules in June 2021 to require servicing companies to negotiate with borrowers options for deferring payment soon after any delay.
During the pandemic, foreclosures dropped significantly due to a federal moratorium prohibiting foreclosures. According to mortgage data provider Black Knight, the number of mortgages subject to foreclosure decreased by about 85 percent year over year from June 2019 to June 2020 and remained so low until February 2021 (see Figure 2).
Figure 2: Number of single-family mortgages eligible for repurchase by month (June 2019 – February 2021)
Note: Ransom data was only available until February 2021 at the time of our review. New foreclosures include vacant and abandoned properties, and unsecured loans that are not covered by CARES.
Federal authorities have taken additional steps to limit pandemic-related mortgage defaults and foreclosures. Federal housing agencies and businesses have expanded deferral options to give borrowers additional time to move in and stay on hold. In addition, they simplified and introduced new loss mitigation options to help borrowers recover their loans after the grace period, including options to defer missed payments until the end of the mortgage term. Extended maturity borrowers typically have large expected payments – an average of $ 8,300 as of February 2021, according to the National Mortgage Database. As a result, according to the Association of Mortgage Bankers, overdue borrowers exiting a payment deferral are more likely to delay repayment. In addition, the revised CFPB mortgage servicing rules allow service providers to simplify the processing of loss mitigation actions and establish procedural safeguards to help limit foreclosure prevention until January 1, 2022.
The risk of a sharp rise in defaults and losses of foreclosures is further reduced by the relatively strong position of borrowers in equity capital due to the rapid rise in housing prices. Equity – or the difference between the present value of the home and any outstanding loan balances – can help struggling borrowers avoid foreclosures by allowing them to refinance their mortgage or sell their home to pay off the remaining amount. According to the GAO analysis of the National Mortgage Database, the few borrowers (about 2 percent) who were patient or late in payments in February 2021 did not have equity capital after accounting for the rise in house prices. By comparison, at the peak of foreclosures in 2011 following the 2007-2009 financial crisis, about 17 percent of all borrowers and 44 percent of overdue borrowers had no equity capital (see Chart 3).
Figure 3: Estimated share of single-family mortgage borrowers without equity capital as of 2020 and 2011, by loan type and status
Why GAO Conducted This Study
Millions of mortgage borrowers continue to face financial problems and potential housing instability during the COVID-19 pandemic. To address these concerns, Congress, federal agencies and businesses have provided borrowers with the option to temporarily suspend mortgage payments and have imposed a moratorium on foreclosures. Both provisions will expire in the coming months.
The CARES Act includes a provision stating that the GAO oversees federal efforts related to COVID-19. This report examines (1) the extent to which a mortgage withdrawal may have contributed to home stability during the pandemic, (2) federal efforts to raise awareness of leniency among delinquent borrowers, and (3) federal efforts to limit mortgage defaults and risk foreclosures after your federal mortgage termination protection expires.
The GAO analyzed data on mortgages and borrower characteristics that used the easing from January 2020 to February 2021 using the National Mortgage Database (a federally managed aggregated sample of single family mortgages). The GAO also analyzed data from the Black Knight and the Mortgage Bankers’ Association on foreclosures and refraining from debt repayments. In addition, the GAO interviewed federal representatives about efforts to engage with borrowers and limit the risks of default and foreclosure. To highlight potential risks, the GAO also analyzed current trends in the equity capital of insolvent borrowers compared to the 2007-2009 financial crisis.
For more information contact John Pendleton at (202) 512-8678 or PendletonJ@gao.gov…