Forbearance
Consumers are confused. Banks are confused. We’re hearing from the President’s office and other officials that there may be forbearance or relief options. But what are they and are they only for specific mortgages?
With a residential mortgage, a homebuyer pledges their house to the bank in exchange for the cash to buy the house. So long as the homeowner pays on time, the bank is happy. If, however, the owner misses a payment, or a few payments, the bank has the right to claim the property through a process called Foreclosure.
Forbearance is when the bank opts for leniency and doesn’t immediately foreclose.
A mortgage can be owned by a bank and guaranteed by a government-sponsored entity such as Fannie Mae, Freddie Mac, or the FHA, which were set up by the government to support the housing market.
These entities each have their own rules which can confuse borrowers and even the banks. But generally, the Federal Housing Finance Agency dictates the guidelines for Fannie Mae and Freddie Mac-backed loans. The FHFA advises borrowers to work with their lenders after 90 days of no payments to set up a plan to either;
- Pay back all of the missed payments at once,
- Tack those payments onto the end of the loan,
- Modify monthly mortgage payments to include the missed payments.
Regardless of what arrangements are made, lenders want their money. Forbearance does not mean free. If you can pay your mortgage, you should pay it!
It’s possible, but still unknown, if forbearance will affect your credit score or your ability to refinance in the future.
The Department of Housing and Urban Development (HUD) oversees the FHA, while the Department of Veterans Affairs dictates guidance on VA-backed loans. Those agencies are working on what should happen once a 90-day suspension of mortgage payments is up.
As of April 6, 2020
Borrowers impacted by COVID-19 are addressed in The CARES Act, which passed in March, 2020. It gives homeowners with federally backed loans several types of relief;
- First, it prevents lenders from beginning foreclosure proceedings.
- Second, homeowners who experienced financial hardship from the pandemic can request a forbearance for up to 180 days, which may be extended for an additional period of up to 180 days if borrowers are still under financial duress.
- There are no fees or penalties
- Your interest rate will not change.
Lenders who are not government guaranteed should follow the guidance from FHFA, HUD and the VA. At the end of an initial 90-day payment suspension, the bank has options available for customers on a case-by-case basis that could include a continuation of a payment suspension, a loan modification, or the addition of suspended payments to the back end of a loan.
Wells Fargo, Bank of America, and Chase are among those lenders.
Contact Your Loan Servicer
“Struggling borrowers should reach out to their servicers to see what options are available to them,” says Kathy Kraninger, director of the Consumer Financial Protection Bureau. “If a consumer has an issue with their servicer, we encourage them to submit a complaint to us.”
If you can pay your mortgage, experts advise continuing to do so. But if you are experiencing financial hardship because of Coronavirus, call your servicer immediately and ask them what forbearance or other relief options are available.
Whatever relief you get, get it in writing!
“Communication is vital,” says David Dworkin, president and CEO of National Housing Conference, a nonprofit affordable housing advocacy group. “You need to call your servicer and ask for help, and then you need to stay in touch with your servicer as your situation changes.”
Be prepared to remain on the phone for a while. Loan servicers, who are receiving many calls, have likely been affected by the pandemic and could be facing staffing issues. Having all your paperwork on hand will help.
What About Jumbo Loans?
The wealthiest, most-reliable mortgage borrowers in the U.S. are beginning to hear an unfamiliar word from lenders, “No.”
Wealthier buyers are proving to be just as likely to stop paying their mortgages. Approximately 5.5% of jumbo loans — 131,000 borrowers — have asked to postpone payments due to a loss of income, compared with 6% of all loans, according to Black Knight Inc.
While lenders are not required to allow missed payments on loans that aren’t government-guaranteed (such as Jumbos) they should be following the government’s lead and using The CARES Act for their borrowers.
It’s only natural since they don’t want to alienate their customer base. They may want to recruit them back after the crisis.
And foreclosing on Americans during a pandemic risks hurting a lender’s reputation.
Once this is over, we still have to get along with each other…
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