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The current pool of US borrowers in forbearance is more vulnerable to delinquency when the programme ends, according to research published by the New York Federal Reserve’s blog, but this doesn’t mean delinquencies will approach levels seen during the financial crisis.

A crucial part of the US policy response to the coronavirus crisis involved reducing the risk of a pandemic-driven housing bust and a wave of foreclosures like during the financial crisis. A key policy stemmed from the Cares Act that allowed borrowers with federally backed mortgages to pause or reduce debt service payments for six months, with some agencies granting 12 additional months of extensions.

The authors said the success of the programme has sheltered borrowers in sharp contrast to the financial crisis “when ever-rising consumer delinquencies and foreclosures were both a driver of the financial crisis and then, in a vicious cycle, a consequence of the crisis, as housing prices dropped and almost 12m Americans went into foreclosure”.

More than 6.1m of mortgage borrowers entered forbearance since the start of the pandemic but many sold their properties as house prices surged because of housing demand. More than 2m are still seeking a payment holiday on loans as of March and of those 1.2m had entered forbearance in June last year or earlier.

Borrowers with the highest credit scores pre-pandemic were least likely to seek relief and only a quarter of them remain in forbearance, compared with those with lower credit scores pre-pandemic, where half are still in forbearance. The authors said:

One manifestation of this is that their payment rate is lower than the payment rate of those who exited forbearance more quickly. As a result, in March, over 70 per cent of borrowers in forbearance were not making payments, a higher share than any month in 2020.

The serious delinquency rate could rise to about 3.8 per cent once the measure ends, if all these borrowers become delinquent, the researchers said. That would be above the pre-pandemic rate of 1.3 per cent, but below levels seen during the financial crisis.

“Nonetheless, from where we are now, it seems improbable that the end of mortgage forbearance will be associated with more than 6 per cent of mortgagors becoming 90 or more days delinquent, as occurred during the Great Recession,” the researchers said.

How these borrowers recover will depend on the US recovery and policy measures.

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