Is mortgage forbearance a good strategy?
OCTOBER 2020 Update to policies can be found here.
According to the Mortgage Bankers Association, roughly 7.5% of home loans were in forbearance as of April 26th – approximately 3.8 million American homes. This represents a percentage rate that is already double that of defaulted loans during the credit collapse of 2009 according to a recent Forbes article.
But what is mortgage forbearance exactly?
It is a mortgage relief program for workers impacted by the COVID-19 virus that is permitted under the federal CARES Act. It allows homeowners to delay their mortgage payments, initially for 90 days, but has been extended until the end of the year. The idea is to assist these homeowners that would regularly be able to cover their mortgage while their earnings are diminished. It is crucially important to point out that it does not forgive these payments however, it only allows for penalty-free deferral. It is also important that homeowners apply for the program as opposed to ceasing mortgage payments without notifying their provider.
What are the pros?
Beyond the deferral option on the monthly payments, the program also suspends foreclosure sales and evictions for 60 days. It also prohibits any credit reporting from the mortgage provider, meaning missed payments do not negatively impact credit scores. At the end of the forbearance, the service provider must work with the homeowner on a plan to maintain or possibly reduce monthly payments using a modification to keep the loan current.
What are the repayment options?
There are 4 ways the loan can be made current at the end of forbearance:
- Full repayment or reinstatement. The missed payments are repaid in lump sum at the end of the period. This option is the least likely.
- Repayment Plan would allow borrowers to pay their regular monthly payments as well as an additional amount to cover the missed period.
- Deferral or modification would keep the original monthly payments the same but the missed payments would be added to the end of the loan.
- Loan Modification involves changing the interest rate, loan term, or some other feature to lower the original amount.
So what are the cons?
There has been a fair amount of confusion amongst homeowners as to how to qualify or implement the program on their loan. Several providers have stated that if enacted a lump sum would be due at the end of forbearance to catch the loan up – rendering the program effectively useless. To dispel this misinformation, Matthew Gardener, Chief Economist at Windermere Real Estate stated that “anyone that has a loan guaranteed by Fannie Mae, Freddie Mac, the FHA, the VA or even the USDA does not have to make a lump sum payment at the end of the forbearance period” in his latest vlog. This has also been stated by Fannie & Freddie.
Service providers who are not receiving scheduled mortgage payments from homeowners are still obligated to pay the bond holders of those loans which predictably makes the mortgage companies very nervous about their liquidity. The federal government has stepped in to say that providers of Freddie and Fannie-backed mortgages – about 62% of all mortgages – need only pay four months to bond holders before the payments are covered by their programs. This relief does not apply to the outstanding loans not covered by the federal program, however. These providers are under no governmental obligations and can only be encouraged to work with homeowners to establish plans to become current on their loans under reasonable terms. As these mortgage companies are concerned about their cash flow, they are pushing hard for balloon payments on their loans at the end of the forbearance which doesn’t help homeowners.
Ultimately, forbearance is intended for those that truly need it. The program is able to prevent a home that would possibly head into foreclosure from doing so which could impact the housing market similar to 2009. If your provider is unable to offer better terms than demanding a lump sum payment at the end of the period it likely isn’t the best option for you.
If you have further questions about mortgage forbearance I would be happy to put you in touch with qualified mortgage professionals that can assist you. If you have any questions about mortgage delinquencies, please read my blog post.