What a break property owners will have getting a forbearance on government-backed (GSE) loans will have. The CARES Act provides for a forbearance for 180 days for homeowners impacted by COVID-19 either through the loss of income or illness. The act further provides for an extension for an additional 180 days after that.
To qualify for such forbearances, the homeowner had to be current on their mortgage payments as of March 1 or less than 31 days delinquent (since the forbearance must be necessitated by the COVID-19 pandemic). If a homeowner qualifies, the lender cannot assess penalties or late fees, and cannot negatively report on credit.
So what could be wrong with this?
First of all, there are people who were sick with coronavirus in Illinois before the first case was confirmed. What if, before COVID-19 was identified as a pandemic, people missed time from work, were hospitalized or couldn’t pay their mortgage in February due to their illness? The forbearance terms don’t really address the entirety of the time COVID-19 has been in this country. And since the act was passed in April, it gives no consideration to alternative realities.
But is getting a forbearance a good idea anyway? As circumstances evolve due to shutdowns, needs evolve as well. That means that forbearance terms may need to evolve also. Originally, the full amount of the deferred mortgage payments needed to be repaid in one lump sum at the end of the forbearance period, like a balloon payment of the full forbearance amount. If a homeowner sought an additional 180 days, then full repayment would be due at the end of the 360 days. The act was unclear as to exactly why people would somehow be able to pay almost 12 months of mortgage payments, when people could not pay their mortgage for 360 days.
The servicer must establish contact with the borrower to assist in resolution of the delinquency. No application is required. The request can be made over the phone (I would never recommend that to a client. At the very least, I would require that the client follow up their conversation in writing).
And, let’s talk about lenders not reporting late mortgage payments to credit reporting agencies. When you make a payment on a revolving or term loan, the credit reporting agencies note the fact of the payment — or nonpayment. So while lenders may not be reporting negatively on your credit, the fact that the payment was not paid is recorded — or, rather, not recorded.
Two of the benefits of the deferral program are first that it can apply to escrowed items (real estate taxes and insurance) which will mean that even people with reverse mortgages can qualify. Second, after the forbearance has concluded the borrower cannot cure, the lender must consider the borrower for a modification.
Right now, interest rates are at about 3%. There is no way to know what they will be a year from now. But even if a forbearance does not impact your credit, it is unlikely that interest rates will remain as low as they are now. So refinancing to pay back a 12-month backlog of payments may not be realistic. Plus, lenders may not be willing to refinance a loan that was in a forbearance.
Of course, 12 months from now we may see a statute that provides that the 12 months is to be tacked onto the back end of the loan or a revitalization of HAMP modifications. There is also a possibility of using a Chapter 13 bankruptcy to cure the 12 months of payments. And remember, the forbearance is only for GSE loans. Non-government backed loans may have similar or alternative programs (the HEROES Act may make other provisions that could extend protections to non-GSE borrowers).
Just as we don’t know what the next impact of the pandemic will be, we don’t know what Congress will do about non-GSE mortgages until HEROES is or is not signed into law. My guess is that they will try to fix that which has become so horribly broken. That doesn’t mean it will be better, of course.