Mortgage Modifications for Government Loans: New Tools Needed for a Higher Rate Environment

Abstract

The Great Recession taught us that loan modifications are often more advantageous to both investors and borrowers than foreclosures. However, government loan modifications are less effective than their conventional counterparts, as the toolkit is very limited. The first step in a government modification is to change the mortgage rate to the current market rate to allow for re-securitization, thus raising the borrower’s rate in a rising rate environment. This offsets monthly payment reduction from the FHA’s partial claim or the USDA’s equivalent and results in a less sustainable modification. In this article, we propose prospectively changing Ginnie Mae pooling requirements to permit in-pool modification with a recast to retain the original note rate; the cost to investors would be very small. If, in addition, the Veteran’s Administration (VA) could offer partial claim or forbearance, it would allow VA borrowers to be on a more equal footing with FHA or USDA borrowers. TOPICS:MBS and residential mortgage loans, financial crises and financial market history, risk management