All the talk these last few weeks is about inflation and record profits that corporations are earning. Inflation is causing record increases in prices of consumer goods like food, gasoline and building supplies. Those rising costs are a problem for my clients, of course- because I work primarily with homeowners who are in foreclosure- but there’s another way that inflation is hitting homeowners in foreclosure really hard – and that means it also affects lots of borrowers around Connecticut and around the country.
COVID Mortgage forbearances have ended
Millions of homeowners took advantage of not having to make mortgage payments during the Covid pandemic through forbearance programs. As those programs ended last summer, only a select few borrowers were given the opportunity to “tack” those missed payments onto the end of their loans and just start making payments again. I say “select few” because you had to have the right kind of mortgage and be able to afford your old payment in order to get that deal. The majority of borrowers I’ve spoken with in the last nine months didn’t time it right—their mortgage servicer did not process a deal for them in a timely manner, and then it was too late (there were too many missed payments to qualify), and instead their only option was to apply for a modification of their mortgage.
Inflation fixes are hurting borrowers
Here is where inflation comes in: in order to fight inflation, the Fed raises interest rates. That means those really low rates that were in place between March, 2020 and December, 2021 to stimulate the economy during the pandemic are no more. This affects most borrowers, but the ones who need the most help (first time homebuyers, and those who qualify for Federal Housing Administration (FHA) mortgages) are the ones paying the price. In September, 2021 the interest rate on a 30-year fixed mortgage interest rate through FHA was 2.28%! Today the same money costs more than double at 5.78%! (To read more about current rates, go here.)
Think about this—corporations are seeing record profits, but they don’t lower their prices voluntarily to stave off inflation, because that’s not how capitalism works. So prices go up. In order to stop prices from getting out of control, the Fed raises the interest rate. And then who ends up paying? The most at-risk borrowers because mortgage interest rates then go up!
I have several clients with FHA mortgages who have to modify their mortgages after taking forbearances during Covid. Their interest rates before they fell behind were sometimes as low as 2% (from having a prior modification), but 3% or 3.5% is more typical. Had they not been affected by the pandemic and kept up with all mortgage payments, they would still have that great rate. But who wasn’t affected financially by the pandemic? Now they need to modify to get back on track to keep their homes, but FHA will not honor their prior interest rate. Its policy is to offer the current rate as of the date of the modification. So my clients who had rates around 3.5% or lower are now facing paying the balances of their mortgages off at rates 2-3% higher. That translates to a difference for some of my clients of more than $200 more per month, and as much as $50,000 more interest paid over the life of their loans. All because of the pandemic, and because of inflation. So the Fed’s attempt to fight inflation negatively affects FHA borrowers. Completely unfair and so backward—the Fed is trying to help the economy, but in so doing delivers a direct hit to the borrowers who are the most vulnerable. FHA needs to change its policy and stop hurting borrowers by raising their rates. Otherwise the forbearances that were designed to help homeowners keep their homes are going to turn into foreclosures.