If you are like most mortgage professionals, you are getting calls about forbearance. The longer you have worked in the industry, the more calls you are getting.
Since the COVID-19 pandemic, I have had friends, neighbors, relatives and even Realtor referral partners ask about mortgage payment relief and the consequences of such relief.
What are you saying to those who ask you about forbearance? Have you suddenly become an expert on a topic that was rarely discussed in the last few years?
This is not my first time being deluged with calls about forbearance. I live and work in a part of New York that was severely impacted by Superstorm Sandy in 2012. Many in my circle reached out to me at that time about not being able to pay their mortgage. My best advice: Study the specific terms of your lender’s offer.
It sounds like a no-brainer, but I’ve spoken with people who did not follow that simple rule. Some found out they had deferred payments but had a balloon payment after three or four months. They were unable to catch up all at once and fell into a more serious financial difficulty.
A year after their forbearance, some clients found out they could no longer qualify for a mortgage. They could not refinance or buy a new property using a mortgage. Their credit history showed too many late payments on their mortgage. Some had more than one instance of “not paid as agreed.” They were surprised because they did not understand the specific terms of what was offered to them.
A few said they heard on the news that they didn’t need to make mortgage payments. They believed a state law or disaster area declaration would allow them to skip or not pay for a month or more. They stopped paying without communicating with anyone. Of course, their loan servicer didn’t give forbearance since they didn’t even know the borrower’s intentions.
Forbearance is one word, but it can mean many things. It could be a full moratorium on payments. It could be a reduced interest rate. It could be a reduced payment. It may mean a balloon payment. It may mean adding the principal and interest payment on to the back end of the loan.
It may impact one’s credit negatively or it may not. Keep in mind: There’s no such thing as a free lunch. Some are making it sound like this is a freebie. Let’s remember forbearance means “holding back” as in holding back a foreclosure. When someone defers a payment, it may mean they are paying extra interest on the deferment. This makes those missed payments more expensive.
Of course, balloon payments are problematic for most. A forbearance gives a borrower time to resolve their problem. In some cases, that means selling the home. In some cases, it means pulling money from other resources or getting help from family.
So, what advice do we give people when they call us and ask about forbearance?
- Forbearance is a way to avoid foreclosure. It is serious. If you can pay your mortgage, that is likely the very best option.
- The CARES Act covers two categories of loans. It covers loans that are federally owned and loans that are backed by federal agencies and entities. Find out if your loan falls in that category. About 38% of mortgage loans in the United States are not federally backed (according to the Urban Institute) and therefore do not qualify for this protection.
- Communicate with your loan servicer. Don’t stop paying without a formal agreement.
- Get the terms of the agreement in writing. Regardless of what is said on the phone, get your offer in writing. That is what counts.
- Understand your specific terms. There is no one size fits all. It doesn’t matter what you heard on the news or what your friend or neighbor got.
According to the Federal Reserve report on the Economic Well-Being of U.S. Households in 2018 survey, about 40% of Americans would have to borrow money when facing an unexpected expense of $400. Twelve percent would be unable to pay the expense by any means. The average mortgage payment in the United States is just over $1,500 per month according to the Census Bureau.
Right now, many people in the country are facing unexpected expenses or some type of income interruption. Many more will likely be facing this in the upcoming months as we enter the “new normal.”
Let’s be sure to give accurate and helpful advice with empathy and understanding.