This prediction comes from a new report released from the Federal Reserve Bank of New York, which points to mounting unemployment and stagnant personal income as key factors that could lead to a major jump in delinquencies. The report noted that current loan delinquency rates are already “substantially above” those of pre-pandemic levels, and a further weakening of economic conditions could lead to significant increases in mortgage delinquency rates.
The report suggests that despite initial efforts to support households, the Covid-19 crisis has had a severe impact on the US economy, leading to substantial hardship for millions of people. With more US households falling behind on payments due to job losses or pay cuts, there is a predicted rise in debt collection cases and an increase in foreclosures. Noting that no comprehensive relief efforts have been implemented so far, the report concluded that further aid was needed to prevent a sharp spike in defaults in 2021.
In addition to job loss, there are other factors that could contribute to a rise in delinquencies. These include an increasing number of borrowers who may be entering into forbearance plans, and are unable to make their original payments. There is also a possibility of mortgage servicers facing cash flow shortages due to the inability of some borrowers to make payments, meaning that they may be unable to make payments to investors. Furthermore, lenders may become less likely to modify mortgages if delinquency rates spike, as this could put their loans at risk.
The report suggests that the best way to mitigate the risks of a serious mortgage delinquency crisis is to provide further economic aid, such as additional stimulus checks, rental and mortgage assistance, expanded unemployment benefits, and more flexible repayment options. In addition, it recommends that servicers should take a more active role in assisting delinquent borrowers by providing alternative payment schemes, waiving late fees, and engaging in more frequent communication with borrowers. Finally, lenders should focus on taking proactive steps to identify and address financial distress early on in order to minimize the chances of defaults.
In conclusion, the report notes that without further economic aid, the US is likely to face a sharp increase in mortgage delinquencies in 2021. The effects of this could be severe, with potential impacts including a rise in debt collection cases and foreclosures, increased investor losses, cash flow shortages in the lending industry, and reduced access to credit for potential homeowners. It is therefore essential that the US government implements further aid in order to protect borrowers, lenders, and the economy as a whole.
This article was contributed on Oct 20, 2023
