As an independent mortgage broker, understanding how the current market climate is affecting the mortgage industry, your real estate partners and borrowers is of the utmost importance. With the recent passing of the CARES Act (Coronavirus Aid, Relief, and Economic Security Act), many mortgage professionals and homeowners are questioning how this bill will impact their lives and livelihoods. Forbearance, specifically, has been a hot topic, but it is not the only option available to homeowners who are facing hardship. Within this blog, we’ll explore what forbearance entails and additional loan modification and repayment options that servicers might be able to offer to homeowners as an alternative.
Topics Discussed in This Blog
- What is forbearance?
- How the Coronavirus Stimulus Bill Impacts the Mortgage Industry
- How a Forbearance Agreement Works
- Loan Payment Options
- Forbearance vs. Deferment
- 5 Things Homeowners Need to Know About Forbearance and COVID-19
- Frequently Asked Questions About Forbearance
What is forbearance?
According to the Consumer Financial Protection Bureau, the definition of forbearance is a temporary suspension of payment on a loan, like a credit card, student loan or mortgage. Loan forbearance for homeowners in the age of Coronavirus is one of the tactics the federal government has proposed to ease the mounting economic pressures facing everyday Americans. However, it is important to note that a mortgage forbearance is not granted to all homeowners, and guidelines for federally-backed mortgages and privately-secured mortgages vary.
It is also important to note that loan forbearance, while it may sound helpful to consumers in the very short-term, can actually be financially challenging shortly thereafter. Forbearance is only a temporary pause on monthly mortgage payments and unless homeowners make individual arrangements with their servicer for loan modifications or repayment plans, the payments will all be owed at once when the forbearance period ends.
“Forbearance is not forgiveness. Forbearance does not relieve the borrower’s obligation, it provides temporary payment relief for people experiencing hardship. That’s why it’s imperative for borrowers to work with their (loan servicer) to understand the option that best fits their needs.” – Willie Newman, CEO of Home Point Financial
How the Coronavirus Stimulus Bill Impacts the Mortgage Industry
The CARES Act is the largest stimulus package in American history and is designed to prevent economic hardship for businesses and individuals affected by the COVID-19 pandemic and ease the economy’s downturn. The bill will allow single-family homeowners with federally-backed mortgage loans (Fannie/Freddie/FHA/VA/USDA) to request temporary suspension of their mortgage payment for an initial period of up to 180 days with the option to apply for an extension from the servicer for up to an additional 180 days. The forbearance period cannot exceed a 12-month time period.
For typical homeowners, the CARES Act outlines options for what would be considered forbearance agreements, or the ability to temporarily suspend monthly mortgage payments, for those affected by COVID-19. Borrowers should contact their servicers if they are uncertain if they have a qualifying mortgage to understand what their specific options are.
For investors and owners with multifamily mortgages, there are also forbearance options available for up to 90 days, which will be granted in 30-day increments. This applies to federally insured, guaranteed, supplemented, or assisted mortgages, including mortgages purchased or securitized by the GSEs.
Read a summary of the CARES Act and find more updates on how the Coronavirus Stimulus Bill affects the mortgage industry on our Legislative Updates page.
How a Forbearance Agreement Works
A forbearance agreement can vary from servicer to servicer, depending on if the loan is federally backed or not. Generally speaking, a typical forbearance agreement can look like this:
One of the difficulties with forbearance is the strain it can cause a homeowner once the forbearance period ends. Since this is a temporary option, it will only delay the monthly mortgage payments to a later date, causing a balloon payment to be due once the forbearance period is over, if the homeowner has not made other loan payment arrangements with the servicer. A homeowner in forbearance should only be utilizing that option because of financial hardship since trying to pay a large sum that equates to multiple monthly payments at one time could be difficult or impossible and servicers aren’t required to offer all alternative options to borrowers under the CARES Act.
Loan Payment Options
additional loan payment option, they will be obligated to resume payments of their loan and repay the total amount missed during the forbearance period — all at the same time. A forbearance is not a one size fits all solution and servicers may provide a variety of loan payment options, but it is incumbent on the homeowner to proactively seek out the best option for their situation by contacting their loan servicer. Loan payment options would generally be outlined in one of the following ways.
Deferment
Deferment is when overdue payments are delayed to a later date. The balance of the loan is due on either the mortgage maturity date, the pay-off date or upon the sale of the property and deferment is usually only an available option after missed mortgage payments, which affect the borrower’s credit. The borrower will need to contact their servicer to see if they qualify for deferment.
Reinstatement
This is when a borrower is required to pay the total outstanding payments owed, in a lump sum, by a specific date. This will follow a forbearance plan unless otherwise specified in the agreement. If the loan is made current following the forbearance period, there is typically no effect on a borrower’s credit.
Repayment Plan
This allows a borrower to pay back past‐due payments with regular payments over an extended period of time in order to bring the loan current. This is typically granted to borrowers who can prove a financial need for a repayment plan because they cannot otherwise bring the loan current.
Loan Modification
This is when a lender changes the terms of a mortgage following default by the borrower in order to avoid foreclosure, usually after a repayment plan trial period. This can include adding time to the end of the loan or changing the amount required in each payment. Modifying a loan is not typically offered until a borrower has missed a payment or payments and will affect a borrower’s credit.
Forbearance vs. Deferment
Loan forbearance and loan deferment are two different options that homeowners who are facing hardship can consider, but there are significant differences between the two. As outlined above, during a mortgage loan forbearance, payments are due in full when the forbearance period ends unless another payment option is agreed to with your loan servicer. Typically, a forbearance period will not exceed 12 months at a time and interest will continue to accrue during the temporary forbearance period.
A mortgage loan deferment is the delaying of payments for a defined period of time due to extenuating circumstances and is often used as a final step to avoid foreclosure. Deferment options are not available from all servicers, can be more difficult to qualify for and may require more detailed documentation during the deferment evaluation process. During a loan deferment, a borrower delays their mortgage payments, including principal and interest, to a later date. The loan balance will be due on either the mortgage maturity date, the pay-off date or upon the sale of the property – whichever option comes first.
The length of the loan term and the payment schedule will remain the same, but the deferment period may vary based on deferment type. Each loan servicer may have multiple deferment types and since these vary from servicer to servicer, homeowners will need to contact their specific servicer to review the options available to them. Additionally, a deferment period can last up to a few years and during the deferment period, interest on the mortgage loan will not accrue. Servicers may not approve all deferment requests and they can be more difficult to qualify for since deferment is not guaranteed by the CARES Act.
Besides forbearance and deferment, servicers may also provide other options for homeowners experiencing hardship, such as loan modifications or repayment plans. Those options will vary from lender to lender and case by case and may require additional financial documentation from your bank or other sources to prove financial hardship in order to qualify.
Find more forbearance information at forbearancereport.com, curated by AIME Member, Scott Schang.
5 Things Homeowners Need to Know About Forbearance and COVID-19
As a mortgage expert, it’s important that you’re able to communicate factual information about the complex state of the market and legislative information and how it all impacts your clients. Here are five talking points you can use to help inform your borrowers and referral partners.
1. Homeowners are Still Responsible for Mortgage Payments
A forbearance agreement only allows homeowners to temporarily suspend their mortgage payments, but once the forbearance period is over, all payments are due. This could prove difficult for borrowers who assume that payments will be pushed back, as opposed to temporarily suspended. Ultimately, they could be surprised when they find themselves responsible for multiple months of mortgage payments at once, as soon as the forbearance period is over, if loan modification or other repayment options have not been specifically arranged with the servicer in advance.
The Department of Housing and Urban Development (HUD) issued forbearance guidelines for borrowers with an FHA loan. This includes the COVID-19 National Emergency Partial Claim as an option for FHA borrowers at the end of a forbearance period.
HUD’s Fact Sheet for Borrowers in Forbearance
The Federal Housing Finance Agency (FHFA) which oversees Fannie Mae and Freddie Mac has implemented policies to assist servicers with liquidity and provided guidelines for servicers to follow when providing repayment options to borrowers. The agency has also partnered with the Consumer Financial Protection Bureau (CFPB) to form the Borrower Protection Program to ensure accurate and fair credit reporting for borrowers who go into a forbearance plan.
Fannie Mae’s Forbearance Policies
Freddie Mac’s Forbearance Policies
Some mortgage backers have also provided guidelines to follow.
HUD’s guidelines for FHA, VA, and USDA mortgages
Fannie Mae’s Forbearance Policies
Freddie Mac’s Forbearance Policies
2. Borrowers May Have to Prove a COVID-19 Related Hardship
The CARES Act outlined the ability to apply for forbearance without proof of hardship, however, borrowers can still be required to prove a hardship for other repayment options like loan modifications, prepayment plans, and deferment. They should discuss what is required with their servicer.
3. Forbearance May be Granted for up to 180 days
It’s important to note that most servicers are offering forbearance agreements for 90 days initially, although the forbearance time period could be up to 180 days, depending on hardship circumstances. Some homeowners could also be eligible for an extension of up to another 180 day period if necessary – borrowers should contact their loan servicer for more information.
4. Foreclosures are Temporarily Halted
Foreclosures for federally-backed loans, including eligible loans held by Fannie Mae, Freddie Mac, FHA, VA, and USDA are temporarily halted. Some homeowners may not know if their loan servicer is federally-backed, so educating them on their type of loan is important. It is also critical for the homeowner to contact their loan servicer to discuss additional available options and the coordinating foreclosure halt time periods associated with them.
5. Applying for Forbearance May Not Impact Credit
As long as mortgage payments are made within the outlined time of the forbearance period, there will be no negative impact on credit scores, but it will still be recorded on the credit history under guidelines provided by the CFPB. However, homeowners who are only reacting to news headlines and assuming that all mortgage payments are delayed may see a negative impact on their credit if a forbearance period is not applied for and mortgage payments are missed. Additionally, there could be further credit implications on credit score and history that are unforeseen at this time. Because there is a lack of reporting from credit agencies about the potential impact of forbearances, homeowners should do everything they can to make their monthly mortgage payments as planned and only apply for a forbearance or deferment as a last resort.
Sam Parker, CEO of My Credit Guy, shares credit health information specifically for borrowers facing financial hardships.
Frequently Asked Questions About Forbearance
Who should apply for a forbearance?
Any homeowner who has suffered a financial hardship including job loss, furlough, or reduced hours due to COVID-19 and cannot afford to cover their mortgage payment can consider applying for a forbearance period. If there are other expenses that can be eliminated to offset reduced household income, those should be explored first. A house is a homeowner’s biggest financial resource and protecting that is essential during economic hardships. Freddie Mac has provided a forbearance resource and suggests borrowers talk to a professional to help restructure debt.
Can you extend your forbearance?
Under the CARES Act, forbearance can be extended for two 180-day periods which amounts to 12 months. Servicers can segment that period up into smaller segments so borrowers will need to reapply for forbearance multiple times as needed.
What happens when a forbearance period ends?
If the homeowner’s hardship has improved, they will need to bring the loan current, which is known as reinstatement. If the homeowner does not have the ability to pay the full amount owed at the time of reinstatement, they will need to work with their loan servicer to establish a repayment plan. If the homeowner fails to meet the obligations of the repayment plan, they can apply for a loan modification. A loan modification is often the last resort but eases the financial burden on the homeowner by folding the delinquent payments owed into the loan amount. The homeowner is also responsible for their homeowner’s insurance and taxes during the forbearance period and will need to make sure the escrow account is funded appropriately.
Where can I find more resources about forbearance?
A borrower should always call their loan servicer directly to find out what options are available to them. The CARES Act only provides guidelines, but that does not necessarily reflect what will be offered to or approved for every homeowner. The Federal Trade Commission has provided a helpful resource for consumers.
Talk to Your Borrowers
Encourage your borrowers and clients to contact you to discuss if a forbearance agreement is right for them. By helping to educate your network and fostering an open dialogue, you’re not only building a stronger relationship with them but also positioning yourself as a trusted mortgage expert.
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