The collapse of the housing bubble and the Great Recession that followed left many mortgage borrowers deep “underwater,” owing more on their mortgage than it was actually worth. With many losing their jobs and struggling to keep their homes, it’s no surprise that delinquency rates on residential mortgages increased sharply during the years after the collapse. Now a new JPMorgan Chase report analyzes the various mortgage modification programs that were instituted to help mitigate the damages of the financial crisis, and what they meant for the borrowers who made use of them.
JPMorgan Chase’s report sampled from 1 million Chase mortgage customers who received a modification, creating a data asset of 450,000 de-identified modification recipients. Those spotlighted borrowers all fit three criteria: 1) they received a modification from the Federal Government’s Home Affordable Modification Program (HAMP), one of the GSEs, or a Chase proprietary modification program; 2) the modification happened between July 2009 and June 2015; and 3) it was their first mortgage modification.
Chase found that “borrowers with similar payment burdens (as measured by pre-modification mortgage payment-to-income ratio, or PTI) received considerably different payment reductions depending on the modification they received.” Borrowers with a mortgage PTI above 50 percent doubled the amount of payment reduction they received from HAMP as opposed to the GSE program—a -55 percent HAMP reduction versus -27 percent under the GSEs. On the other end of the spectrum, borrowers with a low mortgage PTI benefited much less from HAMP. The GSE program granted a -25 percent payment reduction for these borrowers, compared to only -8 percent for HAMP.
According to Chase’s report, a little can go a long way: the report found that a mortgage payment deduction of only 10 percent could decrease the default rate by 22 percent. The report also discovered that most defaults by “underwater” borrowers were likely not “strategic defaults”—in other words, the borrowers weren’t realizing they were underwater and deciding simply to try and cut their losses. “There was no difference between the post-modification default rates of borrowers who received principal plus payment reduction and borrowers who received only payment reduction,” according to Chase.
Instead, by far the driving factor for defaults was found to be sudden income loss. Chase report found a pattern of drops in income being followed closely by a default. That’s not surprising, but it does further clarify why many borrowers wind up defaulting. Chase’s report says, “This pattern held regardless of pre-modification mortgage PTI or loan-to-value (LTV) ratio, suggesting that it was an income shock rather than a high payment burden or negative home equity that triggered default.
Chase also found that underwater borrowers didn’t change their consumption habits whether they received a mortgage principal reduction or not. “There was no difference in the post-modification credit card spending of borrowers who received principal plus payment reduction and borrowers who received only payment reduction relative to their spending 12 months before modification,” said Chase.
You can read the full JPMorgan Chase report by clicking here.