There’s an overwhelming amount of data and headlines circulating. This column is my attempt to make sense of it all for you, the real estate professional, from an overall economic standpoint.
Today, I want to talk about the subject of mortgage forbearance — the pros and cons and whether it will help, or possibly hurt, the U.S. housing market. So, let’s start out with a little history.
Mortgage forbearance is a relief program that was announced by the Federal Housing Finance Agency (FHFA) in response to COVID-19 and the likelihood that, if a significant percentage of businesses countrywide were to shut down, it could create a tsunami of job losses. As a result, many homeowners could start to struggle with their mortgage payments.
The decision to start this program was very timely given that, over the last six short weeks, more 30 million workers lost their jobs, and the ownership housing market is certainly being impacted.
For those not familiar with the forbearance program, let me explain. It allows homeowners in financial distress due to COVID-19 to (temporarily) stop making mortgage payments until they can return to work.
How does it work?
Obviously, the first thing homeowners should do is contact their service provider. They can’t just arbitrarily stop making payments. Once they have entered the program, foreclosures and evictions become suspended.
Payments can be postponed for up to a year, and non-payment will not be reported to the credit agencies. There will be no late fees, and at the end of the forbearance term, the servicer must work with the homeowner and offer options to get them caught up with the missed payments.
There are a few repayment options currently available, but I must tell you that they do vary between agencies. First, they can cut a check for all the missed payments. Alternatively, additional funds can be added to their normal monthly payment, and they can catch up over a period of time.
Another option is to add the missed payments onto the back-end of the loan. Or, the last option would be to go through a loan modification where their payments are lowered, and the term is extended further into the future.
So, this all sounds great, right?
Well, not so fast! Over the past few weeks, I’ve heard several horror stories where homeowners contacted their mortgage servicer just to be told that, if they entered the program, all missed payments would become immediately due when the forbearance period ends.
Clearly, this made the program useless for almost everyone.
At this point, I have to make one thing very clear — anyone who has a loan guaranteed by Fannie Mae, Freddie Mac, FHA, VA, or the USDA does not have to make a lump-sum payment at the end of the forbearance period.
In fact, the misinformation that was being given out by some mortgage servicers was so bad that, just last week, Fannie and Freddie put out separate notes confirming that balloon payments were not required.
Forbearance offered by agencies can help a lot of homeowners, as about 62 percent of all residential mortgages are owned or guaranteed by them. However, it doesn’t help everyone.
How many total households are we talking about, and how many are already in forbearance?
Close to 6.5 percent of all residential mortgages are in forbearance, which means that around 3.4 million homeowners have already started delaying payments. Non-agency mortgages in forbearance account for around 740,000 of these loans.
A concern that has become apparent is that mortgage servicers of both federally guaranteed and non-guaranteed mortgages are still obligated to make payments to the bondholder, even if the homeowner is in forbearance and is not making payments.
Because of this, servicers are all very concerned about their own liquidity levels and whether they might actually run out of money before the homeowner is able to make up the missed payments.
Now, the government is aware of this. It recently announced that servicers of Fannie- and Freddie-backed mortgages only need to make four months’ worth of payments after which Fannie and Freddie will make the payments to the bondholders themselves.
But that doesn’t help non-agency-backed mortgages where the forbearance options are not so favorable.
The Consumer Finance Protection Bureau, financial regulators and many state authorities are encouraging financial institutions to work with these borrowers when it comes to making up missed payments. However, all they can do is offer “encouragement,” as they can’t force mortgage companies to provide the same options as their agency counterparts.
As these servicers are not required to offer reasonable terms to borrowers and, because of their own cash flow concerns, some are doing their best to make it hard for the homeowner and are pushing for balloon payments at the end of the forbearance period.
I sincerely hope that these mortgage servicers find a way to offer options other than balloon payments because I fear that if they don’t, we could see a increase in foreclosures as homeowners are left with few options.
Forbearance is intended for those who truly need it, and for a lot of households in these troubled times, it can be a great option.
The program has the ability to limit the number of homes that, without forbearance, might have been forced into foreclosure, which could easily destabilize the U.S. housing market.
But I do urge homeowners who are thinking about using this program to read the fine print. It may not be as good an option as they might think — especially if they are forced into making lump-sum payments at the end of the forbearance period.
Matthew Gardner is the chief economist for Windermere Real Estate, the second largest regional real estate company in the nation.
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