Loan modifications at GSEs dropped, but signs of early distress emerge

Foreclosure-prevention activity dropped for the sixth time in seven months in October for Fannie Mae and Freddie Mac-backed loans, but signs of early-stage borrower distress have emerged.

Completed foreclosure-prevention actions on loans held by the government-sponsored enterprises declined 10% to 18,833 in October from 20,885 a month earlier, according to the Federal Housing Finance Agency. The total also represented a far steeper fall of over 71% from 65,735 a year earlier, as scores of mortgages exited forbearance relief plans introduced by the government at the start of the COVID-19 pandemic. 

Prevention actions encompass a variety of possible plans to assist borrowers, such as loan modifications, forbearances and payment deferrals, as well as short sales. 

One of the most common actions, completed loan modifications, fell by 14% to 6,500 in October, down from 7,524 a month earlier. After a sharp ramp-up between October 2021 to March 2022, modifications have followed a similar pattern of gradual decreases in subsequent months. 

Approximately 57% of modifications completed in October involved extended loan terms. Plans with principal forbearance made up 12% of all modifications during the month.

Meanwhile, payment deferrals granted also dropped to 8,200 from 9,141 month over month, a decline of 10%. A year earlier, deferrals were approximately 560% higher at 45,965.

The latest Fannie Mae and Freddie Mac data reflect broader trends seen on mortgage performance throughout the industry, showing a more stable pattern among distressed loans returning over the past few months. The Mortgage Bankers Association's Loan Monitoring Survey reported a consistent forbearance rate of 0.7% over the last three months. 

But an uptick in early-stage delinquencies seen in FHFA's October data continued trends from the third quarter and could register greater concern among servicers if numbers don't come down in following months. 

Loans past due by 30 to 60 days increased 12% between September and October to 263,989. At the same time the number of newly initiated forbearances increased 34% to 18,432 from 13,739.

A likely cause of the sharp one-month rise in early delinquencies and new forbearances came from the aftermath of Hurricane Ian, which swept across Florida at the end of September. However, even though overall forbearance numbers increased almost 4% to 81,556 from 78,432, they made up only 0.26% of GSE loans serviced.

The volume of loan modifications and other forms of servicer aid to borrowers may also see some further adjustments going forward compared to the pre-pandemic era. Even though servicers' assistance for homeowners affected by COVID-19 is approaching its end, the Consumer Financial Protection Bureau updated procedures last week to make pandemic relief options permanent. 

"We understand these streamlined options have been very successful in keeping consumers in their homes, and note that COVID-19 will continue to impact families, even beyond the national emergency," the CFPB wrote on its website.