Plunging Mortgage Delinquency Rate Shows Forbearance Is Doing Its Job

Delinquencies dropped during 2021's first quarter. This is a big reason why.

Many Americans lost their jobs or saw their income decline in the course of the pandemic. And for homeowners, mortgage forbearance was a lifeline.

Under the CARES Act, the sweeping relief bill signed into law in March 2020, homeowners who could claim financial hardship and requested forbearance couldn't be denied. Under forbearance, monthly mortgage payments could be paused without being recorded as delinquent. And that's important, because delinquencies show up on credit reports, and can send credit scores plummeting.

Because so many homeowners took advantage of forbearance, the delinquency rate for mortgages on residential properties with one to four units decreased to 6.38% of all outstanding loans at the end of 2021's first quarter, according to the Mortgage Bankers Association's National Delinquency Survey. That represents a small drop from the fourth quarter of 2020. But will that rate continue to decline, or could it rise in the near future?

What happens once forbearance runs out?

When forbearance was initially put into place, homeowners got a 12-month reprieve on paying their mortgages. Forbearance was then extended to last up to 18 months.

But soon, borrowers who put their mortgages into forbearance early on in the pandemic will see that option run out. There's concern that we could then see delinquency rates increase -- and see foreclosure rates boom in the months that follow.

It's in the best interests of homeowners and loan servicers alike to prevent that scenario. The Consumer Financial Protection Bureau (CFPB) has proposed a rule banning foreclosures for the remainder of 2021. That rule would, in turn, protect mortgage borrowers whose finances haven't improved by the time their forbearance periods end.

That said, the CFPB has also made clear that it expects mortgage loan servicers to work with borrowers so they can stay in their homes when forbearance runs out. To this end, loan servicers are expected to modify mortgage terms so that homeowners can keep up with their payments.

As it is, loan servicers cannot demand a lump-sum repayment to make up for missed mortgage payments under forbearance, and many are likely to extend borrowers' loan terms to allow for catch-up payments at the end. Loan modification could take this concept one step farther by extending mortgage repayment calendars so that monthly payments shrink and are easier for borrowers to swing.

While a lot of people are better positioned financially now than they were early in the pandemic, not everyone has recovered. If loan servicers continue to work with mortgage borrowers, we could see delinquency rates hold steady at lower levels or even drop in coming quarters. But if loan servicers aren't flexible, not only could delinquency rates soar, we could face a foreclosure crisis like none other.