While most homeowners with GSE-backed mortgages have recovered from pandemic-related hardships and reinstated their mortgage, as of June 7, about 1.6% of outstanding GSE borrowers were in a state of nonpayment: about 140,000 GSE-backed loans were in COVID-19 Forbearance, and another roughly 300,000 loans were delinquent outside of forbearance. For those GSE borrowers who were less than 2 months delinquent as of the onset of the pandemic who cannot resume their originally scheduled monthly payments due to ongoing pandemic-related financial hardship, the GSEs offer the COVID-19 Flex Modification (Flex Mod), which targets a 20% reduction in the monthly principal and interest (P&I) payment to create an affordable monthly payment for the borrower. Analysis from post-Great-Recession modifications provides compelling evidence that substantial payment reductions are critical to avoiding subsequent re-defaults and foreclosures.

However, because of the recent rise in mortgage rates and two years of significant house price appreciation (HPA), the COVID-19 Flex Mod will not be able to reach the 20% P&I reduction target for nearly all of the remaining borrowers who need assistance. With the rise in house prices and interest rates over the past year, over 95% of borrowers are denied the tool of principal forbearance to reduce their payments and a large percentage will not be able to reduce their interest rates.

We do not expect that the GSEs can adopt a policy of providing every borrower with principal forbearance up to the 30% of UPB limit given the GSEs’ sensitivity to the cost. However, borrowers with an MTMLTV between 50% and 80% should be given the choice between substantial payment relief at or close to the COVID-19 Flex Mod target and selling their home. Therefore, to provide GSE borrowers facing continued pandemic-related hardship with the substantial payment reductions that the Flex Mod targets, the GSEs should adjust the COVID-19 Flex Mod to permit principal forbearance up to an amount that creates a post-modification MTMLTV ratio of 50% or greater, rather than the current 80%. While we suggest a 50% MTMLTV cutoff, we do not have access to a distribution of GSE MTMLTVs; based on that distribution, FHFA may determine that the cutoff should be lower than 50%.