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Roughly 7.5% of home loans were in forbearance as of April 26, according to the latest tracking survey conducted by the Mortgage Bankers Association. Translating to 3.8 million American homeowners with payment suspension plans, that percentage is expected to keep climbing up.
“With millions more Americans filing for unemployment over the week, the level of job market distress continues to worsen,” said Mike Fratantoni, MBA’s Senior Vice President and Chief Economist, in a press statement. “That is why we expect that the share of loans in forbearance will continue to grow, particularly as new mortgage payments come due in May.”
To put this in perspective, the delinquency rate of all residential mortgages in the first three months of 2008, at the onset of the Great Recession, stood at nearly 3.7% before it escalated to 11.5% in the first quarter of 2010, according to the Federal Reserve Bank of St. Louis.
“Forbearance is already double the percentage of defaulted loans at the great credit collapse of 2009,” says Tom Millon, CEO of third-party mortgage servicer Computershare Loan Services in the U.S. “At one point the proportion of loans with Fannie Mae and Freddie Mac that defaulted peaked at around 4%, and the rate of forbearance is currently around 8%.”
Even if loan servicers have been offering forbearance under the federal CARES Act – and a slew of clarifying rules by the government-sponsored enterprises Fannie Mae and Freddie Mac – for about six weeks now, confusion persists among borrowers.
As industry experts anticipate the number of Americans seeking forbearance to continue rising this month, here is what you need to know before asking your servicer for mortgage payment relief.
Forbearance vs forgiveness
Initially granted for 90 days to loan holders suffering from COVID-19-prompted financial hardships, forbearance can be extended for up to a whole year. Once the suspension period ends, though, the forborne amount needs to be repaid – and, several options exists for that. In other words, forbearance does not equate forgiveness.
The impact of forbearance on credit scores
What forbearance means is a postponement of obligations, which does not damage borrowers’ credit scores even if loan servicers continue to report the status of the mortgage to credit bureaus. Any missed payments before the start of the forbearance period, however, do weigh down credit scores.
Moreover, “if borrowers don’t repay, they will incur negative credit reporting,” says Emanuel Santa-Donato, director of capital markets at Better, a technology-based consumer loan originator.
The impact of forbearance on future loan refinance
One facet of forbearance that Santa-Donato says is little known is the potential temporary inability to refinance a home loan afterwards. While suspending mortgage payments avoids “delinquency in the eyes of credit reporting agencies,” it does count as a “gap in payment from an underwriting standpoint,” he says.
If a borrower misses two consecutive payments on a government-backed mortgage in the span of 12 months, he or she would be ineligible for a loan refinance for a year, says Santa-Donato.
“I had to clarify this with some of the underwriting experts on our side,” he says. “That’s something that I haven’t heard spoken about at all as a particular downside to forbearance.”
The type of loan servicer
While servicers – be they national banks or small credit unions – must adhere to the same guidelines, those with a footprint in the borrowers’ communities “are invested in being good partners,” says Rick Bennett, executive vice president and consumer lending director at UMB Bank.
“A strong, healthy community has lenders that are an integral part of their customers’ growth and success,” he says. “Those lenders are vested in homeownership. It’s in their best interest to provide financial advice with service to the residents.”
Yet, concerns abound in the home finance industry about the ability of non-bank as well as small loan servicers to cover mortgage advances to investors during customers’ forbearance. Even if Freddie Mac and Fannie Mae recently announced that servicers need to only cover four months of missed payments, servicers with limited liquidity may not be as flexible with repayment plans, for instance, as their larger counterparts.
Government-secured mortgages vs private loans
Nearly 30% of homeowners have private loans, which are currently not covered by the CARES Act. Nonetheless, a string of local governments, including New York, California and New Jersey, have instituted their own mortgage forbearance rules that extend to non-federal loans. On their own volition, some servicers are also offering payment suspensions to private mortgage borrowers.
“Most creditors base their strategies and solutions on guidance from regulatory agencies,” says Bennett. “The fact that a mortgage is not federally insured may allow for more flexibility in finding an equitable solution. But, communication is the key.”
Other options for cash-strapped homeowners
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Because servicers are tightening their origination criteria and discontinuing some loans, borrowers need to carefully weigh their options.
“Some pretty large players pulled out the cash-out refinancing market because they view it as riskier,” says Santa-Donato. “Better doesn’t hold that view. We’re still open for business.”
Better has increased its credit score requirement from 620 to 680 points, he says.