Article written by FCM CEO Keith Canter
Banks in the U.S. have been banned from foreclosing on homes since early 2020, due to the federal government’s efforts to assist homeowners feeling the financial pinch of the pandemic. The mortgage foreclosure moratorium was scheduled to end July 31, putting thousands of families at risk. The federal eviction moratorium was slated to end on that day as well.
Forbearance, foreclosures and evictions are different events, but here we will focus on forbearance and how the current status may impact the future for homeowner. And for now, I’ll set aside deciphering the current state of these moratoriums, as they are still in play as I wrap up this article.
Focusing on forbearance
Forbearance is an agreement between the lender and the borrower to delay a foreclosure. This pauses or reduces mortgage payments for an agreed-upon period while the homeowner builds back financially. It is something millions of borrowers did in the early days of the pandemic. There was a huge amount of uncertainty, about both personal and family health issues as well as employment.
In general, additional fees, penalties or additional interest (beyond scheduled amounts) are not added to forbearance accounts. And because of the pandemic, anyone going into forbearance does not have to submit qualifying documentation. The majority just inform their lender or servicer that they are being impacted by pandemic-related (financial) hardship.
Payments are not forgiven or erased via forbearance. Borrowers will eventually repay any missed payments – when they ultimately refinance or sell the home or over time beforehand. Before the forbearance ends, the servicer (where monthly payments are sent) will contact the borrower about how to repay the missed payments.
To put things in perspective, the Mortgage Bankers Association calculates that 3.5% of all homes (approx. 1.75 million homeowners) are now subject to a forbearance plan. Again, forbearance is not debt forgiveness, but merely delaying the repayment of the debt for a period.
When forbearance ends
Forbearance exits – those who signal they are ready to get back on track and can meet the previous, “normal” payments and schedule – remained low. And there has been an increase in new forbearance requests for Ginnie Mae and portfolio (primarily FHA and VA loans) and “private label security” (PLS) loans. But new requests have been decreasing in general, so the net result has been slight weekly declines in loans in forbearance.
About 65% of forbearance plans (1.2 million homeowners) are slated to expire this year (2021), according to Black Knight. (This includes the 80% of all FHA and VA loans that are in forbearance.) Three quarters of a million plans would expire in September and October alone. So, over the course of just these two months, the nation’s mortgage servicers would have to process up to 18,000 expiring plans per business day, guiding borrowers through complex loss mitigation waterfalls directed by changing regulatory requirements.
The operational challenge this represents is staggering, even before noting the oversized share of FHA and VA loans. Given the heightened challenges those borrowers may face in returning to making mortgage payments as compared to those in Fannie Mae or Freddie Mac loans, effective loss mitigation efforts and automated processes become even more critical.
It is truly a numbers game. Each week borrowers exit their plan for assorted reasons. Most exits resulted in a loan deferral/partial claim. Some continued to make their monthly payments during forbearance or did not make all monthly payments, exiting forbearance with no loss mitigation plan.
A smaller percentage consists of reinstatements: Past-due amounts are paid back when exiting forbearance. Still others receive a loan modification or trial loan modification. Of course, a percentage of these loans are paid off through refinance or by selling the home. A small number are ultimately addressed via repayment plans, short sales or deeds-in-lieu-of-foreclosure.
High home prices pay off
Housing prices have been rising steadily for years, and many parts of the country are now facing record high prices for existing homes, which means that there are few homeowners “underwater,” meaning they owe more on their mortgages than the overall value of their homes. This tends to incentivize lenders to collect missed payments on the back end of the mortgage (again, through forbearance) or to restructure the loans altogether.
There are likely to be more forced sales than foreclosures, if things worsen. That way a bank’s loan is paid off and the delinquent homeowners receive the equity they earned in the home and will walk away without a negative mark on their credit report. It takes time to start foreclosure proceedings, at least 120 days per federal law, plus time for court proceedings.
What’s ahead
The Federal Government is working on a tool for the Homeowners Assistance Fund. About two million homeowners are still in some type of mortgage forbearance. And there are measures in place to help renters, including an online tool released by the Consumer Financial Protection Bureau: the Rental Assistance Finder, created to help consumers easily find, and apply, for assistance. And the White House announced a series of measures aimed at preventing foreclosures. Members of Congress are also pushing banks and mortgage servicing companies to provide private relief.
Last year there was speculation that forbearance would be catastrophic when all of these loans modified, but the agencies involved are putting forth flexible plans to work with borrowers to stay in their homes AND for the borrowers who simply can’t afford their homes. For those, they are fortunate that home prices have risen, and most should be able to sell and avoid the short sale and foreclosure paths.
Borrowers should check with their lender or servicer for the most up-to-date information and path forward, always being mindful of how various solutions may affect their credit going forward.
View original press release here: https://www.nasdaq.com/articles/forbearance-and-foreclosure-moratoriums%3A-is-the-clock-done-ticking-2021-08-09