Another mortgage storm is possibly on the horizon as millions of U.S. homeowners look at a provision of the new CARES Act that allows for mortgage payment relief for struggling families due to the effects from the COVID-19 pandemic. As agents and brokers, it is vitally important for you to be a subject matter expert on things that could affect your current and future clients. This is certainly one of those things.
This storm has two fronts and could possibly cripple not only the mortgage industry but also the entire real estate industry in the coming months. Before we go any further, let’s go over the provision from the act:
The CARES Act provides that a Federally backed mortgage loan borrowers who have been (A) current on their payments as of February 1, 2020, and (B) who affirm they are experiencing financial hardship due to the COVID-19 emergency may request a forbearance from loan servicers.
On the first front, the CARES Act allows for some borrowers to seek forbearance for as much as 180 days, with no impact to their credit. Most help will be available, but only to those who ask for it, and the place to ask for it is their loan servicer. To qualify for forbearance, borrowers must have loans backed by Fannie Mae, Freddie Mac, the Federal Housing Administration, VA or USDA. The only problem is this could confuse borrowers on what happens with those payments after the period is over.
The crazy part is the verification process to qualify for this. Just take a look at what the questions are:
- Do you need payment assistance? *Affirmative answer will make you eligible
- Do you understand all unpaid monies are due in full at the end of the Forbearance? *Affirmative answer will make you eligible
That’s it! This easy qualification process could cause normal, not necessarily troubled borrowers, to take advantage of a perceived “break” in paying their mortgage only to be shocked when that 3-6 months of payments bill suddenly becomes due, therefore putting their home at risk of foreclosure at a time when equity in homes is at its largest. According to CoreLogic, borrower equity in their homes rose to an all-time high in 2019 and has more than doubled since the housing recovery started.
On the second front, it has been projected by Mike Fratantoni, chief economist at the Mortgage Bankers Association, that if one-quarter of U.S. homeowners — about 12.5 million households — seek forbearance for six months, servicers could still owe between $75 and $100 billion to investors because some of the government agencies require the servicers to continue to make payments even if the borrower is not making payments. These servicers already plan on a certain percentage of their borrowers to go into default but not one-quarter of them.
Allowing the mortgage industry to destabilize could trigger another huge cycle of foreclosures. Even though it wouldn’t echo what we saw in 2008, it could have a huge effect. Servicing companies, banks and lenders are looking for Congress to intervene quickly so they will not have to dip into reserves that are possibly insufficient to cover these payments over the long term.
Some would quickly fail, and if there is no one to collect mortgage payments and get the money to investors of mortgages, then the entire industry could fail. Investors would be holding the bag on worthless mortgage bonds. And most importantly to the real estate community, lenders would then not have the funds that they typically lend to new borrowers, therefore, at worst, crashing the whole housing system, and at best, a liquidity crunch.
Congress and the Federal Reserve now realize this, and hopefully, help is on the way. But until then, tell your clients to not just rely solely on the knowledge of the servicing agent to whom you speak. Tell them to do some research of their own, call the lender who did their loan, go online, and gather as much information as possible — it could just be their financial lifesaver.
Shane Spink is the regional manager for Acopia Home Loans in Atlanta.