Katrina and mortgage lender forbearance

What happens to borrowers caught by hurricane?
Published on Sep 20, 2005

How will mortgage lenders treat borrowers caught by Katrina? Speculations about this abound, some plausible, some ridiculous. This note lays out the alternatives, and their implications for both parties. I will illustrate them with an example. The loan balance of the affected borrower is $100,000, the rate is 6 percent, the loan has 300 months (25 years) to run, and the monthly payment is $644.31. Five hundred dollars of this payment is interest and $144.31 is principal. Assume the borrower needs a "payment holiday period" of three months. Option 1: Add the unpaid monthly payment ($644.31) during the holiday period to the balance, then recalculate a new payment. This is an absurd option because the lender would be penalizing the borrower rather than helping him/her. (I would never have mentioned it except that it has been mentioned to me.) The lender has a claim only on the unpaid interest, not on unpaid principal that would have been used to pay down the balance. Adding unpaid prin...