RADAR Group, Federal Reserve Bank of Philadelphia, Lessons Learned from the CARES Act Mortgage Forbearance Program and Its Aftermath (First Quarter 2023) (Philadelphia Fed consumer finance report 23-02, 2023)
Summary
A First Quarter 2023 report, "Lessons Learned from the CARES Act Mortgage Forbearance Program and Its Aftermath," from the RADAR Group, Federal Reserve Bank of Philadelphia. The report says its overall findings are that the program mitigated a default wave like that experienced during the Great Recession of 2008-09, and that more than 95 percent of the estimated 8.5 million borrowers who entered forbearance have exited. It also discusses the FHA Payment Supplement Account (PSA) Program, which will be able to reduce FHA borrowers' payments by up to 25 percent for those 90 or more days past due. Tables and figures show forbearance outcomes and past due rates by race and ethnicity as of January 9, 2023.
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“RADAR Group, Federal Reserve Bank of Philadelphia, Lessons Learned from the CARES Act Mortgage Forbearance Program and Its Aftermath (First Quarter 2023) (Philadelphia Fed consumer finance report 23-02, 2023).”
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First Quarter 2023
Lessons Learned from the CARES Act Mortgage Forbearance Program
and Its Aftermath
From the RADAR Group, Federal Reserve Bank of Philadelphia
Since the COVID-19 emergency will soon be over, this is our In a forthcoming paper, we examine the program in-depth.2
final report. So, it’s time to sum up. Here we summarize its main findings and discuss one vestige
of its aftermath: the FHA Payment Supplement Account (PSA)
When we began our analysis on the CARES Act Mortgage Program, specially designed for FHA borrowers, but which
Forbearance Program, the housing market was in crisis. After is unavailable to VA borrowers as of this writing. Our overall
the shutdown of the economy in March 2020, unemployment findings are that the program mitigated a default wave like
peaked at 14.9 percent in April 2020. By May 2020, around 6.6 that experienced during the Great Recession of 2008–09, as
million mortgages in the U.S. were either past due or in some both government and private lenders participated on a broad
state of forbearance as the program was officially launched. scale to provide forbearance relief to all who requested it.
And the program achieved its objectives of providing relief to
Since the CARES Act only applied to federally insured
those most in need of help.
mortgages, there was no assurance of the extent to
which private investors not subject to the program would Just as importantly, of the borrowers who entered
participate. And since borrowers needed only to request forbearance and cured, almost three-quarters of their
a forbearance to be granted one, it was unclear how large requests were worked out in some way by mortgage servicers
the program would become. Finally, since forbearance to keep them in their homes. Thus, our findings show that
only provides temporary relief, it was unclear whether the CARES Act Mortgage Forbearance Program with private-
servicers would be able to provide the longer-term relief sector participation provided short-term debt relief to those
for the millions of borrowers in forbearance to keep them most in need, with subsequent servicer workout programs
in their homes. providing longer-term help to keep millions of borrowers in
their homes.
At the Federal Reserve, we acquired Black Knight’s McDash
Flash database that allowed us to track mortgage loan We also analyze a new FHA Payment Supplement Account
performance on a weekly basis. And by merging our data (PSA) Program that will be able to reduce FHA borrowers’
with the Home Mortgage Disclosure Act (HMDA) application payments by up to 25 percent for those 90 or more days past
data, we could track the extent to which the program was due on their mortgages, specially designed for the current
addressing those most in need of assistance. When our first high mortgage rate environment.
report came out on September 3, 2021, more than 3 million
mortgages were still in some state of nonpayment.
As the program winds down, more than 95 percent of the
Figure 1: COVID-19 Forbearance Rates by Investor,
estimated 8.5 million borrowers who entered forbearance
April 2020 to December 2022
have exited. Figure 1 depicts the progress made over time 18%
by the major investor groups. Forbearances have dwindled FHA/VA
to levels consistent with prepandemic levels for portfolio 15% GSE
PLMBS
lenders and the government-sponsored enterprises, Fannie Portfolio
Mae and Freddie Mac. The one remaining group of sizable 12%
forbearances are the FHA/VA borrowers, with now close to
9%
200,000 mortgages still in forbearance.1
6%
3%
0%
20
20 20
20 /0 4/ 21
20
2020 /0
/1 7/
0/ 21
21
21
20 1/2
21 /0
/0 4/ 1
20 21/0
20 7/2
21/1 21
1
20
20 22
22 /00/
1/15
18
20 4/1
20 22 /0
/0 7/ 5
20 22 15
22 /0
/19/
2/ 30
31
Sources: Black Knight Data & Analytics, LLC; and RADAR
1
Assessing the CARES Act Mortgage Forbearance The remaining borrowers are still in forbearance or out
Program of forbearance and delinquent or defaulted. Note that
11.7 percent of borrowers paid off out of delinquency or
Table 1 summarizes how the 8.5 million borrowers who
forbearance. These are borrowers more likely to have
entered forbearance during the first year of the pandemic
defaulted had there not been robust house prices. While not
exited forbearance.3
shown here, many borrowers not receiving help were very
We first note that around 22.5 percent of borrowers ever deeply delinquent prepandemic, so they were not in a good
in forbearance were able to self-cure through a lump sum position to be helped.
payment; 58 percent needed help of some kind to cure; and
Also not shown here but detailed in our research, more
19.5 percent have yet to exit forbearance, paid off out of
minority and lower-income mortgage borrowers were able to
delinquency or forbearance, or are delinquent or defaulted.
avoid delinquency on their mortgages than their White and
While around 80 percent of borrowers were able to exit
higher-income counterparts. Unconditionally, we find that,
forbearance one way or another, of those who have cured,
after accounting for forbearance, delinquency rates for Black
58 percent/80.5 percent = 72 percent, or almost 5 million
borrowers fell from 6.9 percent in 2019 to 1.9 percent in 2020,
borrowers, received some sort of assistance from their
while for White borrowers, the rates fell from 1.3 percent to 0.5
mortgage servicers to stay in their homes.
percent.
Table 1: COVID-19 Forbearance by Category As a result, Black borrowers were able to shrink the
delinquency rate gap between Black and White by 4.3
Category 1: Self-Cure 22.5% percentage points by taking up forbearances. Furthermore,
Category 2: Became Current with Help 58.0% we show that minority and lower-income borrowers took up
Repayment Plan 22.7% forbearance at significantly higher rates, conditional on having
entered nonpayment. Without forbearance, delinquency rates
Deferral 18.1%
of minority and lower-income borrowers would have been
Modification 16.4% twice as high as those of White and higher-income borrowers.
Trial Modification 0.9%
Category 3: Forbearance/Delinquent/Default 19.5% The FHA Payment Supplement Account Program
Still in Forbearance 2.0% As shown in Figure 1, FHA/VA borrowers have the highest
In Loss Mitigation, But Not Paying 1.6% remaining forbearance rates. They also happen to be the most
challenging to work out in the current high-interest rate
Delinquent, Not in Loss Mitigation 4.2% environment. To modify an FHA loan, the servicer must
Paid Off from Forbearance or Delinquency 11.7% purchase the loan out of the Ginnie Mae pool at par, or
Default 0.1 % 100 percent of the unpaid principal balance (UPB). Then,
to resecuritize the modified loan without incurring a loss,
Total 100.0% the servicer must set the rate on the modified loan to the
Sources: Black Knight Data & Analytics, LLC; and RADAR prevailing market rate so that it can be sold at par. Most
seriously delinquent loans have a note rate well below current
market rates, so increasing the note rate as part of the
Table 1 also separates the three large categories into the modification offsets most or all the payment reduction
kinds of help received to reperform and for those that did provided by other modification steps (such as extending the
not reperform. We can see that among those who received loan term to 40 years or deferring principal).
help, borrowers were most likely to have gone through a
repayment plan (23 percent). Deferrals of past due arrears The Payment Supplemental Account (PSA) Program is an
where borrowers resume timely payment (18 percent) and alternative to a traditional modification, designed to lower
formal modification (16 percent) are the next most likely a borrower’s monthly payment by up to 25 percent without
options. Note that these rates of assistance occurred in the changing loan terms, thus allowing for an in pool modification.
order from least to most costly for investors, suggesting that It does so by expanding the use of the partial claim (PC)
mortgage servicers performed workouts in the order preferred allowed for FHA loans, which is a no-interest subordinated lien
by investors based on cost. held outside the Ginnie Mae security that the borrower
accumulates and then pays back at the time of payoff.
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Specific details of the PSA Program are documented in for the PC to absorb the deferred payments. As detailed in
Appendix 1. Here we use a representative loan in Table 2 to Appendix 1, the goal of the PSA is to reduce the borrower’s
illustrate how the program works. The loan has $300,000 in payment by 25 percent for the first 48 months and 12.5
UPB with arrearages of $25,000, including principal interest, percent for the last 12 months. In this case, to achieve the
taxes, and insurance (PITI) advanced by servicers. The full 25 percent payment reduction target, the payment needs to
PC capacity is 30 percent of UPB, or $90,000. A PC is a no- be reduced by $300 for the first 48 months (=$300/$1,200)
interest subordinated lien outside the security trust, so any and $150 for the last 12 months. This $16,200 payment
additions to it do not affect existing loan terms. shortfall can be easily absorbed in the $65,000 PC capacity,
even after adding in the $25,000 in missed PITI payments. In
total, the PC amount used is $41,200, which is 46 percent of
Table 2: Illustration of Payment Supplemental
the full PC capacity.
Account (PSA) Program
To assess how effective the PSA is in achieving its goals, we
Unpaid Principal Balance (UPB) $300,000
ran the PSA algorithm using our McDash Flash sample on all
Existing Principal & Interest (P&I) payment $1,200 the FHA borrowers who were 90 or more days delinquent on
Past due arrears $25,000 their mortgages, which is a condition for inclusion in the PSA
Partial claim capacity = 30%*($300,000) $90,000 Program.4 As shown in Table 3, more than 95 percent of the
FHA seriously delinquent borrowers have enough PC capacity
Past due arrears covered = $25,000 $25,000 to achieve the payment-reduction goals.
Funds available for PSA = $90,000 – $25,000 $65,000
Not all borrowers will qualify for the full payment assistance.
New mortgage payment = (75%)*$1,200 $900
These are borrowers who have missed so many payments that
Funds needed to meet P&I reduction target for past due PITI payments absorb most or all their PC capacity.
$16,200
5 years About 1.2 percent of borrowers can receive the full PSA for
(25%*$1,200)*48 + (12.5%*$1,200)*12 a period of between three and less than five years. These
are borrowers who on average are behind by 20 payments.
Enough funds for 5 years? ($65,000>$16,200) Yes
Another 1.2 percent can get a lesser payment reduction
Actual amount in PSA = Min ($65,000, $16,200) $16,200 of around 11 percent; these borrowers on average are 25
Partial claim amount used = $25,000 + $16,200 $41,200 payments behind. And around 2.5 percent of borrowers who
have missed around 35 payments will have the past due PITI
Partial claim capacity used = $41,200/$90,000 46%
fully absorb all PC capacity, so they will be unable to receive
Sources: HUD, RADAR any payment reduction.
In sum, based on our large sample of FHA borrowers, our
First, the $25,000 of arrearages are placed into the PC assessment is that the proposed PSA Program can help more
account, making the funds available for the PSA, which is than 95 percent of borrowers achieve the full benefit of the
$65,000 in this case. Next, a calculation is made as to how five-year PSA Program.
much is needed to achieve the program’s P&I reduction
targets for five years and whether enough capacity exists
Table 3: Assessing the Proposed FHA Payment Supplement Account Program
Number of
PC=30% Sample Missed PC P&I
Supplemental Payment Period 3-5 years Counts Share Payments Usage Reduction
No supplement payments available 924 2.5% 35 100% 0%
Provides less than target P&I reduction for 3 years 455 1.2% 25 100% 11%
Meets P&I Reduction Target for 3-5 years* 432 1.2% 20 100% 25%
Meets P&I Reduction Target for 5 years* 35,734 95.2% 7 41% 25%
37,545 100%
Notes: PC = Partial Claim; P&I = Principal and Interest.
* The P&I reduction target is 12.5 percent for the last 12 months of the supplemental payment period.
Source: RADAR estimates using data from Black Knight Data & Analytics, LLC.
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A final point is that the PSA will generally be optimal for Program and other workout programs of ongoing importance,
these special cases in which market rates are substantially especially as house prices started to decline in the second half
above borrowers’ fixed mortgage rates. More traditional of last year. To examine past due rates by race and income, we
modifications may be preferred when market rates are below merged a sample of our servicing data from Black Knight Data
existing note rates, which was the case before recent Federal & Analytics with confidential HMDA data, where borrower
Reserve rate increases. race and household income are collected at application.
As shown in Figure 2, 7.0 percent of Black borrowers are
An observant reader will notice that no mention has been in some past due state, the highest of any group. Hispanic
made about Veterans Administration (VA) loans. The reason borrowers have the next highest rate, above those of White
is because the VA does not have the tool of PCs. The or Asian borrowers.
VA provided them during the COVID-19 pandemic until
last October but let their authority lapse. Getting them Past due states include borrowers in forbearance, borrowers
reauthorized will require legislation, which could potentially be not in forbearance but in some stage of loss mitigation,5 and
a big help for VA borrowers if they became eligible for a PSA. borrowers who are delinquent but neither in forbearance nor
in loss mitigation.
Demographic Characteristics of Past Due For further details on Figure 2, see Appendix 2, which
Mortgages includes these past-due percentage breakouts, as well as
For completeness, we close out by showing that, despite the past due rates by income quartile and for our four major
successes of the CARES Act Mortgage Forbearance Program, investor groups.
past due rates remain much higher for minority and lower-
income borrowers, making applications like the FHA’s PSA
Figure 2: Past Due Rates by Race and Ethnicity as of January 9, 2023
7.0%
7%
6%
5%
4.5% 4.5%
4%
3% 2.8%
2%
1.4%
1%
0%
Non-Hispanic Non-Hispanic Hispanic Non-Hispanic Non-Hispanic
Black Other Race (of Any Race) White Asian
In Forbearance In Loss Mitigation Delinquent
Sources: Black Knight Data & Analytics, LLC; Home Mortgage Disclosure Act (HMDA); and RADAR
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Appendix 1
Payment Supplemental Account (PSA) Program Details
z Place PSA at the bottom of the COVID-19 waterfall.
| Offer if borrower:
– Has a greater remaining partial claim (PC) capacity than arrearages,
– Cannot resume payments with a standalone PC, and
– Cannot obtain 25 percent P&I reduction through standard Recovery Mod (RM).
| Target 25 percent P&I reduction for four years and 12.5 percent reduction for the fifth year to reduce payment shock.
| After catching up borrowers, servicer places PC funds in a no-interest restricted account to supplement borrowers'
monthly principal payments over time.
z Details
| Catch up borrower arrearages using PC funds.
| If possible, provide a 25 percent P&I reduction for two to four years and a 12.5 percent reduction for each subsequent
year, for a minimum three-year total period.
– (The test for sufficient PC capacity is to provide a 25 percent reduction for >= 2.5 years and <= 4.5 years.)
| If this level of reduction cannot be provided for the minimum three-year period, offer whatever reduction is possible for
three years, with no graduated payment, if:
– The reduction is >= a de minimus amount, such as 5 percent, and
– PSA reduction is > can be provided by the standard relief modification.
| Borrower who redefaults:
– Can cure default during the PSA Program using any undrawn PC funds and reenter the existing PSA Program but
cannot receive a second PSA Program during the existing plan.
– Alternatively, can reenter the FHA waterfall and receive a standalone PC or modification using undrawn PC funds in
addition to any funds remaining in the restricted account.
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Appendix 2
Mortgage Shares in Different States of Nonpayment by Demographic/Investor Groups as of
January 9, 2023
Delinquent, No Forbearance
Demographic/Investor In Loss Not in Loss Mitigation
Classifications In Forbearance Mitigation 30-60DPD 90+DPD Total
Race and Ethnicity
White, Non-Hispanic 0.6% 0.5% 1.2% 0.5% 2.8%
Black, Non-Hispanic 1.6% 1.3% 2.9% 1.2% 7.0%
Asian, Non-Hispanic 0.3% 0.3% 0.6% 0.2% 1.4%
Other Race, Non-Hispanic 0.7% 1.0% 1.9% 1.0% 4.5%
Hispanic (of Any Race) 0.9% 0.7% 2.3% 0.6% 4.5%
Income at Origination
1st Quartile (Lowest) 1.0% 0.9% 2.0% 0.8% 4.6%
2nd Quartile 0.8% 0.7% 1.6% 0.6% 3.7%
3rd Quartile 0.6% 0.5% 1.1% 0.4% 2.5%
4th Quartile (Highest) 0.3% 0.3% 0.5% 0.2% 1.3%
Investor Type
GSE 0.4% 0.3% 0.5% 0.2% 1.4%
FHA/VA 1.2% 1.3% 3.1% 1.2% 6.8%
PLMBS 2.7% 1.5% 5.4% 2.2% 11.8%
Portfolio 0.4% 0.3% 0.9% 0.5% 2.1%
Servicer Type
Bank 0.5% 0.4% 1.2% 0.4% 2.5%
Non-Bank 1.3% 1.7% 2.5% 0.9% 6.4%
Notes: Figures are from a 20 percent random sample of data from Black Knight Data & Analytics originated in 2019 and prior matched with confidential
Home Mortgage Disclosure Act (HMDA) data.
Sources: Black Knight Data & Analytics, LLC; HMDA; and RADAR
In this table, we further break out past due loans between those 30- and 60-days past due (DPD) and those 90 or more DPD,
which includes loans in foreclosure.
For borrowers’ household income data, we divide them by metropolitan statistical areas (MSA) median income (also in HMDA),
then categorize into quartiles. We categorize borrowers relative to median income in their MSAs in the application year to make
household purchasing power at application comparable across MSAs and time.
For our four major investor groups described in Figure 1, consistent with these demographic trends, FHA/VA loans have
significantly higher shares in nonpayment because their business is targeted to low- to moderate-income borrowers, who
also have higher shares of minorities. PLMBS loans have the highest nonpayment rates; they primarily hold nonagency
nonconforming mortgages.
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Endnotes
1
Mortgages in private-label mortgage-backed securities (PLMBS) are higher by percentage, but PLMBS are a small share of the market, and 99 percent of the loans
in forbearance are pre-2009, many of which have been previously modified.
2
See An, Cordell, and Lee (2023) forthcoming. The views expressed in this report are solely those of the authors and do not necessarily reflect the views of the
Federal Reserve Bank of Philadelphia or the Federal Reserve System.
3
We focus on mortgage borrowers who entered forbearance in 2020 since they are the bulk of forbearances; we also include many cases whose forbearances
expired of this writing.
4
To reduce the moral hazard of borrowers requesting PSA assistance, HUD requires borrowers to be 90 or more days delinquent on their mortgage or be able to
document imminent default. Being seriously delinquent on a mortgage imposes large costs to borrowers in degraded credit scores that restrict access to credit or
raise its costs substantially if they do need to obtain credit.
5
Borrowers in loss mitigation and not in forbearance include borrowers in a trial loan modification in which borrowers are offered lower payments and the
servicer requires several consecutive payments to be made before these more favorable loan terms are made permanent and borrowers are brought current
on their mortgages.
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