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The Journal of Structured Finance

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

Laurie S. Goodman and Karan Kaul
The Journal of Structured Finance Summer 2019, 25 (2) 35-44; DOI: https://doi.org/10.3905/jsf.2019.1.076
Laurie S. Goodman
is the founder and co-director of the Housing Finance Policy Center at the Urban Institute in Washington, DC
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Karan Kaul
is a research associate in the Housing Finance Policy Center at the Urban Institute in Washington, DC
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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: CLOs, CDOs, and other structured credit, statistical methods, options, credit risk management

  • © 2019 Urban Institute. All rights reserved. Not to be reproduced or redistributed without permission.
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The Journal of Structured Finance: 25 (2)
The Journal of Structured Finance
Vol. 25, Issue 2
Summer 2019
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Mortgage Modifications for Government Loans: New Tools Needed for a Higher Rate Environment
Laurie S. Goodman, Karan Kaul
The Journal of Structured Finance Jul 2019, 25 (2) 35-44; DOI: 10.3905/jsf.2019.1.076

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Mortgage Modifications for Government Loans: New Tools Needed for a Higher Rate Environment
Laurie S. Goodman, Karan Kaul
The Journal of Structured Finance Jul 2019, 25 (2) 35-44; DOI: 10.3905/jsf.2019.1.076
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  • Article
    • Abstract
    • MODIFICATIONS
    • GOVERNMENT MODIFICATIONS
    • WHAT IS THE IMPACT OF THE LIMITED MODIFICATION TOOLKIT FOR GOVERNMENT LOAN?
    • OPTIONS TO INCREASE THE EFFECTIVENESS OF GOVERNMENT MODS IN A RISING RATE ENVIRONMENT
    • WHAT IS NEEDED FOR IMPLEMENTATION?
    • CONCLUSION
    • ADDITIONAL READING
    • ENDNOTES
    • REFERENCES
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