Since the COVID-19 outbreak, millions of borrowers paused their mortgage payments to regain their financial footing by taking advantage of widespread access to forbearance programs. Others sought to refinance or secure a new loan at historically low rates but were met with higher-than-normal mortgage costs. Researchers in the Bank’s Supervision, Regulation, and Credit (SRC) and Research Departments and the Consumer Finance Institute focused their attention on the evolving mortgage market. Their work has contributed to a growing body of knowledge about how the mortgage and consumer credit markets have changed and what policies and interventions may be needed to support a healthy economy.
Forbearance Helped Preserve Homeownership in the Short Term
Just months after the onset of the pandemic, the Risk Assessment, Data Analysis, and Research (RADAR) Group, the research arm of SRC, began examining mortgage forbearances and delinquencies. In monthly reports, RADAR’s researchers tracked the latest figures and analyzed trends to see how borrowers are responding to mortgage relief programs and what impacts these programs are having on different groups, including minority and lower-income borrowers.
Since March 2020, an estimated 8.55 million borrowers have taken advantage of the Coronavirus Aid, Relief, and Economic Security (CARES) Act forbearance plans — “an unprecedented scale for forbearance that has not been widely used before this pandemic,” notes Xudong An, an assistant vice president who leads this research on the RADAR team. “The assistance came at a critical time, and the widespread availability was key since the pandemic’s impacts were not felt equally across groups.”
Researchers looked to previous episodes of mortgage market distress to discover whether lessons learned there helped inform a more effective policy response. In “Helping Struggling Homeowners During Two Crises,” Ronel Elul, a senior economic advisor and economist, and Natalie Newton, senior research assistant, detail how — despite a near record mortgage default rate of 6 percent in June 2020 — a more efficient and coordinated response during COVID-19 helped many homeowners navigate the crisis and stay in their homes. They point to a more streamlined process and fewer barriers to accessing assistance as key differences for mitigating much of the mortgage risk.
We gained important insights from the Great Recession, including how vital access to payment relief is.Larry Cordell
Senior Vice President, Risk Assessment, Data Analysis, and Research Group,
Federal Reserve Bank of Philadelphia
“We gained important insights from the Great Recession, including how vital access to payment relief is,” said Larry Cordell, senior vice president of the RADAR Group. “The CARES Act does not require borrowers to prove hardship to get a deferral or loan modification, and servicing rules adopted by the Consumer Financial Protection Bureau require servicers to offer borrowers these options before they place a loan in foreclosure. Simply, borrowers needed to request a loan modification to get one.”
As of March 2022, just 682,000 borrowers remain in forbearance and roughly 1 million mortgages that either came out of forbearance or never entered it remain seriously delinquent, or more than 90 days past due. Borrowers today, researchers note, have options.
“Our current (as of early 2022) housing market is characterized by rapidly rising house prices and excess demand for homes,” Cordell said. “The positive equity scenario that borrowers have today provides them with more options to avoid foreclosure. They can take advantage of the various home-retention options or sell their homes to extract the equity.”
Disparate Impacts and How Loan Modification Can Help
The research also explored how the pandemic was impacting borrowers differently. Using a novel data set combining anonymized demographic and income data from several sources, researchers were able to pinpoint how forbearance and loss-mitigation activities were affecting different racial and ethnic groups and lower-income borrowers. Trends began to emerge that signaled the need for further exploration of what interventions may be needed to assist these borrowers.
“We found that lower-income and minority borrowers took advantage of these relief programs at higher rates, which is a positive,” said An. “But we also found job and income losses due to the pandemic highest among Black, Hispanic, and lower-income borrowers than other groups. This makes options for exiting forbearance successfully — such as easy-to-access loan modifications that lower payments substantially — essential.”
Researchers also analyzed a range of loan modifications aimed at reducing borrowers’ payments. Because these modifications are easy to process and often require little documentation or contact with borrowers, they can be provided to many past due borrowers. One option researchers noted was fast-tracking the Federal Housing Administration’s (FHA) 40-year mortgage. The availability of this loan modification would help more FHA borrowers, many of whom are lower income and minority borrowers, to reduce payments by 20 percent or more.
Additionally, to help support communities where need is prevalent, Philadelphia Fed experts developed a mapping tool in partnership with the Federal Reserve Bank of Atlanta that can identify regions where loans in forbearance or delinquency are highly concentrated. The tool outlines mortgage delinquency and forbearance rates at the state and county level, or even by zip code. Government agencies, nonprofits, community development practitioners, and others have found this tool helpful in targeting their outreach to assist communities where forbearance and delinquency rates are high.
A Red-Hot Housing Market with High Mortgage Costs
While many anticipated that pandemic shutdowns and limited physical contact would stymie the mortgage market, a paper coauthored by the Philadelphia Fed’s Lauren Lambie-Hanson and James Vickery, Paul Willen of the Boston Fed, Aurel Hizmo of the Board of Governors, and external partners, found quite the opposite. In their research, the authors identified more than $4 trillion in new mortgages originated in 2020 — the highest in decades. This increase was driven in part by historically low interest rates. Yet, researchers also found soaring loan margins paid to mortgage lenders.
“Our aim was to see whether lower interest rates were being fully passed through to mortgage borrowers,” Lambie-Hanson shared. “Or what, if any, of the pandemic’s disruptions to lenders were being passed along to consumers.”
Researchers also investigated whether these impacts were being distributed equitably. Using loan origination data, rate locks, and rate sheets from 280 metros and rural areas, they found that the high demand for loans coupled with an unusually challenging environment to operate in, such as in-person turned virtual services like appraisals and closings, understaffed offices, and a limited supply of licensed loan processors and loan officers, contributed to a sharp rise in the price of intermediation in the mortgage market. Additionally, these factors constrained the supply of loans to consumers, shutting out applicants with lower credit scores and making more complicated loans, such as jumbo loans or those that do not carry a government-backed guarantee, less desirable to process — all of which contributed to significant growth in the fintech sector.
“The findings point to the role of capacity constraints in the mortgage market,” Vickery noted. “Mortgage lending is a highly cyclical business because borrowers rush to refinance when rates fall significantly. It is difficult for lenders to quickly ramp up to meet demand, leading to higher margins and slow adjustment of mortgage rates. It seems this dynamic was even more pronounced during the pandemic than in prior refinancing waves. Working on ways to use technology to further streamline the origination process is an important challenge for the mortgage industry moving forward.”
A Growing Gap Among Homeowners in Philadelphia’s Neighborhoods
Homeownership has long been viewed as a pathway to building long-term wealth, yet in Philadelphia, Black homeownership is declining. In 2019, less than half of Black residents owned homes in the city — a significant decline from 30 years ago, according to research from the Federal Reserve Bank of Philadelphia.
In 2021, researchers Jacob Whiton, Theresa Y. Singleton, and Lei Ding sought to explore the reasons behind this growing gap in homeownership in Philadelphia. They found that while home values have gone up, incomes for certain groups have gone down. In the last 20 years, the inflation-adjusted median home value in Philadelphia nearly doubled, while the median household income among Black residents declined.
“At the time of this analysis, a median home in the city would cost over five times what an average Black worker makes in a year — a ratio that is even higher today,” said Ding, community development senior economic advisor at the Philadelphia Fed. “This, coupled with limited access to mortgage credit and other historical and structural barriers, has resulted in significantly less Black Philadelphians building household wealth through homeownership.”
They also found that conventional mortgages are too often out of reach for aspiring Black homeowners. In 2020, Black mortgage applicants were 2.7 times more likely to be denied by lenders than White applicants. Lenders often cite high debt-to-income ratios and limited credit histories as reasons Black applicants are denied. Racial disparities in underwriting criteria, however, partly reflect the historical racism and long-standing inequalities.
Lastly, historical segregation and redlining are still eroding opportunities. Remnants of past policies, including the discriminatory practices carried out by the Home Owners Loan Corporation and the Federal Housing Administration, still challenge predominantly Black communities, as reflected in low investment and higher denial rates for mortgages.
“What these findings point to is the need for strategic and collaborative solutions at the federal, state, and local levels,” said Singleton, senior vice president and community affairs officer at the Philadelphia Fed. “If we can better understand the underlying factors contributing to the widening gap in Black-White homeownership in Philadelphia, then we can work toward addressing these barriers that persist in the housing market.”
- The views expressed here are solely those of the author and do not necessarily reflect the views of the Federal Reserve Bank of Philadelphia or the Federal Reserve System.