What happens when a mortgage is canceled? -Liberty Street Economics

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What happens when a mortgage is canceled?

As we discussed in our previous postMillions of mortgage borrowers have entered into abstinence law since the start of the pandemic, and more than 2 million remain in the program as of March 2021. In this post, we use data from our Consumer Credit Group (CCP) to study abstinence borrower behavior. … Credit bureau data is ideal for this purpose because it allows us to track borrowers over time and link changes in mortgages to changes in other loan products. We found that leniency led to a reduction in mortgage delinquencies and was associated with increased repayment of other debts, suggesting that these programs significantly improved the financial position of borrowers who received them.




Abstinence and delay on mortgages

Since March 2020, we have seen over 6.1 million pledgers have entered into deferred payment. As noted in our previous post, these abstainers were much more likely to commit delinquency before the pandemic than the general mortgage population. One of the benefits of leniency for these previously overdue borrowers is that the beginning of the leniency often coincides with the “cure”: changing the mortgage status to “current”. That is, for many borrowers, mortgage delinquencies wear off when the borrower is lenient, at least temporarily. (These status changes occur without payment confirmation, supporting the conclusion that treatment is the result of administrative changes and not true treatment.
Mortgage servants obey investorsunlike credit bureaus, these loans are shown as overdue. However, it is important to note that these investor reports do not affect the credit histories of borrowers.)

The first chart below shows the credit bureau’s mortgage status reports for those who entered the abstinence terms by May 2020. About 8 percent of mortgages were already overdue before they took effect. The vast majority of those accounts for which payments were not previously made are considered “current” during the grace period, some of them make payments and some do not. A smaller part – about 30 percent of previously overdue invoices – remain overdue throughout the entire period. These differences in treatment after entering abstinence seem to be influenced by the practice of the attendants. Thus, current foreclosures and delinquency statistics from the credit bureau do not accurately represent the stresses in the housing market.


What happens when a mortgage is canceled?

At the same time, as is the very manifestation of tolerance. Why? Because most of the patient mortgage lenders actually continue to make their monthly mortgage payments. Indeed, the proportion of borrowers who continue to make payments on deferral is surprisingly high: every month since June 2020, 30 to 40 percent of deferred borrowers make their monthly payments.

This behavior suggests that some borrowers have taken advantage of a deferred payment program and missed payments, while others have applied for a deferred payment as an “insurance policy” that they do not claim and they are reducing their balances every month, as originally envisioned in mortgage. contract.

But for 60-70 percent of patient borrowers who don’t pay, mortgage balances don’t fall. In 2019, mortgage lenders paid off about 4 percent of mortgage balances through recurring payments. In contrast, for tolerant borrowers, account balances increased by 1-2 percent over the past year, as the automatic amortization resulting from mortgage payments was largely absent and the percentage component of the missed payment was added back to the balance sheet too. As of March 2021, of the 5 million borrowers who showed leniency for at least one month after the pandemic and did not make an advance payment, about 26 percent have a higher mortgage balance than a year earlier.

Abstaining from mortgages and paying off other household debts

We can also use the CCP to study the relationship between forgoing a mortgage and paying a borrower on non-housing debts. However, this will take a slightly longer period of time. In the chart below, we show that delinquencies on non-mortgages (which reflect delinquencies on auto payments, credit cards, and other consumer debt) were consistently higher among those who had at least one month of abstinence since March 2020; indeed, before the pandemic it was a group of borrowers whose delinquency rates were not only high, but growing. (We are not looking at student debt here, as the vast majority of student debt was automatically written off from the first weeks of the pandemic.) Immediately after March 2020, delinquencies on non-housing debts leveled off for a short time, but then began to rise again. and was 5.8 percent in March 2021, which is a whole percentage point higher than a year earlier. In contrast, the delinquency rate for those who did not receive a mortgage grace period for the year ended March 2021 was roughly unchanged at around 2 percent.

Thus, we have a half-empty / half-full glass situation: these are clearly problem borrowers, and the abandonment of the mortgage provided assistance that could very well have allowed them to keep their homes. However, these borrowers were already struggling with debt repayments before the pandemic, and leniency prevented them from closing the delay gap with other pledgers; instead, the gap persists despite patience.


What happens when a mortgage is canceled?

The second aspect of efficiency that may be of particular interest during a pandemic of limited consumption is the payment of the debt balance. We have noted in the past that cumulative credit card balances fell sharply in 2020 and were more than $ 100 billion at year-end below December 2019 levels. This is the largest annual decline in credit card balances in at least two decades, and it continued in the first half of 2021… IN accumulation of savings by US households during a pandemic was undoubtedly a key factor in paying off high-value credit card balances. Has the mortgage delay affected the households that received it?

In the following table, we provide some evidence for this assumption. The chart shows the relative credit card balances for pledgers who showed patience after March 2020 (red) and those who did not (blue). Card balances declined for both groups, but somewhat more resiliently for lenient borrowers: by March 2021, they had cut their credit card balances to 23 percent below March 2020 levels. This compares to a 15 percent decline for mortgages without leniency. Credit card payouts in dollars are even higher for those who are lenient, as their initial average credit card debt as of March 2020 was significantly higher at $ 9,000, compared to $ 6,000 for those who were not lenient. As a result, the typical household canceled on a mortgage has reduced its credit card debt by $ 2,100 over the past year, compared with $ 900 from the unforgiving mortgage lender.


What happens when a mortgage is canceled?

The ability to reduce credit card liabilities over the past year has not been the same for different types of mortgage borrowers in terms of tolerance. The following chart shows that the decline in the balance for districts outside the top quartile of income has now reached 20 percent below the March 2020 level. In the highest-income areas, which received the largest share of mortgage benefits, as shown in a previous blog post, credit card balances fell even more, down 30 percent as of March.


What happens when a mortgage is canceled?

Conclusion

Our quick overview of what happens to borrowers when they are patient provides some interesting insights. First, many previously overdue borrowers are flagged as “current” because they enter into a deferred payment condition even if they do not make a payment. As a consequence, the credit bureau’s response to mortgage delinquencies must be viewed with caution in a period of widespread leniency. Secondly, a significant part (about 30-40 percent) of borrowers who manage to show leniency, nevertheless, continue to make payments. This will affect our expectations of how the offending measures will change when abstinence ends. Finally, patient mortgagers were able to pay off their credit cards faster than those who were not patient, especially in higher-income regions. In the next post, we will focus on a group of mortgage borrowers who stand out from the crowd for a different reason: they own a small business.

Andrew F. HowoutAndrew F. Howout is the senior vice president of research and statistics at the Federal Reserve Bank of New York.

Donghun LeeDonghun Lee is an employee of the Research and Statistics Group of the Bank.

Joel ScullyJoel Scully is Senior Data Strategy Officer in the Bank’s Research and Statistics Group.

Wilbert van der KlauwWilbert van der Klauw is Senior Vice President of the Research and Statistics Group of the Bank.

How to cite this post:

Andrew Howout, “What Happens When a Mortgage Is Canceled?” Federal Reserve Bank of New York Liberty Street Economics, 19 May 2021, https://libertystreeteconomics.newyorkfed.org/2021/05/what-happens-during-mortgage-forbearance.html.


Additional posts in this series

Keeping borrowers up to date in a pandemic

Small Business Owners Turn To Personal Loan

What lies ahead for borrowers?

Related reading
Economic inequality: a series of studies

Press briefing

Keeping borrowers up to date in a pandemic


Denial of responsibility

The views expressed in this post are those of the authors and do not necessarily reflect the views of the Federal Reserve Bank of New York or the Federal Reserve System. The authors are responsible for any errors or omissions.

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