According to the Consumer Financial Protection Bureau (CFPB), “Forbearance is when your mortgage servicer or lender allows you to temporarily pay your mortgage at a lower payment or pause paying your mortgage. You will have to pay the payment reduction or the paused payments back later.” As a result of the CARES Act, borrowers in financial distress due to the coronavirus pandemic can request forbearance on their home loans for up to 180 days, with an option to extend for an additional 180 days. https://www.consumerfinance.gov/ask-cfpb/what-is-forbearance-en-289/
The specific options available to the homeowner depend on whether the mortgage is government-backed (FHA, VA, USDA, Fannie Mae, Freddie Mac) or privately funded, who the loan servicer is, and any investor-specific loan terms. Options can include a forbearance period of six months followed by full repayment of missed payments, pausing your payments for a year with missed payments added on the end of your loan, or reduced payments for several months, followed by catch-up (larger) payments over the ensuing year.
At this point some of you may be thinking “I don’t even have a mortgage so why should I care about this.” Or “Lucky me, I’m an essential worker so no problem with mortgage payments here”. We think there are several important reasons for all of us to be paying close attention to these trends. For one, someone you know, one of your children perhaps or another relative with a mortgage, may be unexpectedly out of work and considering forbearance, and there are some potential pitfalls to be aware of. It is not that easy to get through to loan servicers at the moment as they are swamped with calls. And unfortunately, forbearance requires communicating with your servicer to see what options are available in your particular case, and then formally requesting it; you can’t just stop making your payments.
Even more important, during the Great Recession owning your home free and clear did not protect you from the carnage in home values brought on by foreclosures and short sales. According to Black Knight, a real estate and mortgage data and analytics firm, 3.6 million homeowners were late on their mortgage payments as of the end of April, a near doubling of the national delinquency rate from March. https://www.blackknightinc.com/black-knights-first-look-at-april-2020-mortgage-data/. More ominously for us, delinquencies in Nevada led the way at 5.2%. The data were not broken down between those in forbearance arrangements and those who weren’t, and hopefully many will be helped over a short-term hardship by forbearance. Our concern is, that hope assumes a fairly rosy scenario, with most of the currently furloughed or laid off workers quickly back on the job. A recent New York Times article quotes Stanford economist Nicholas Bloom as estimating that 42% of recent layoffs will result in permanent job loss. nytimes.com/2020/05/21/business/economy/coronavirus-unemployment-claims.html .
Even if worst case scenarios are avoided, if there is one thing we learned during the Great Recession, falling behind on one’s mortgage payments is extremely difficult to recover from. Even those who received loan modifications found themselves back in foreclosure more often than not, and as market values sank lower and lower, many just gave up and walked away.
On the more optimistic side, the current crisis was not created through poor judgment by borrowers, mortgages lenders, MBS packagers, and bond traders, and mortgages made since that time are far different. Nonetheless, keeping a wary eye on the situation seems prudent. If you’d like to discuss further how this might impact you and any plans to buy or sell in the near future, don’t hesitate to call.