Recent discussions have revolved around inflation and the remarkable profits corporations are currently enjoying. This surge in inflation is translating into significant hikes in prices for consumer goods such as food, gasoline, and building supplies. While this poses a challenge for my clients, mainly homeowners facing foreclosure, there’s an additional way in which inflation is disproportionately impacting this group—and by extension, numerous borrowers across Connecticut and the nation.
COVID Mortgage forbearances have ended
During the Covid pandemic, millions of homeowners opted for mortgage forbearance programs, allowing them to temporarily forgo mortgage payments. As these programs concluded last summer, only a select group of borrowers had the opportunity to add the missed payments to the end of their loans and resume regular payments. This option, however, was limited to those with specific mortgage types and the financial capacity to afford their previous payments. In the past nine months, most borrowers I’ve interacted with were unable to capitalize on this option due to delays in processing deals by their mortgage servicers. Consequently, it became too late, with too many missed payments disqualifying them, and their only recourse was to apply for a mortgage modification.
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.