Mortgage Forbearance Extended Once Again

Forbearance Extended to 18 Months

What started initially as a 6-month homeowner assistance program at the start of the pandemic has been extended multiple times to a current 18 month forbearance period. The CARES Act continues to extend the mortgage assistance program for all federally backed mortgages which includes Fannie Mae, Freddie Mac, HUD/FHA, VA, and USDA loans. Most are familiar with what the forbearance program is at this stage but just in case, it is a pause of your mortgage payment for a limited amount of time due to a financial hardship caused by Covid-19.

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Understanding Forbearance

Mortgage forbearance was put into effect to temporarily halt or reduce mortgage payments during a national emergency. As businesses were forced to shut down operations tens of millions of Americans became jobless or had their hours cut. The forbearance has given homeowners the ability to remain in their homes without the worry of losing their homes. During the initial uncertainty of the pandemic and its effects and length of impact it seems to have been a blessing for many. According to the Mortgage Bankers Association, since the forbearance program rolled out at the end of March 2020 there have been over 4.3 million homeowners that requested the assistance. Today over 2 million remain in the program. As we continue to be impacted by Covid and progress with recovery, many homeowners still have a need for assistance and cannot afford their monthly payments.

Ending Forbearance

Having crossed the one-year marker of this relief program, with vaccinations being heavily pushed out, and economies rebuilding, many have ended their forbearance plans or are preparing for the end. When a homeowner is ready to end their forbearance they have the following options:

1. Reinstatement – Pay off the entire forbearance balance due which includes the principal, interest, taxes, and insurance payments you missed in one lump sum.
2. Repayment – Develop some sort of repayment plan with the mortgage servicer to repay the forbearance balance due. An example of this would be dividing up the amount due over the course of a few months and adding that to the top of one’s normal monthly payment.
3. Deferral – Tack the mortgage payments missed to the end of one’s loan term. Lump-sum would be due at the end of the current mortgage term as a balloon payment, or upon refinancing or selling the property.
4. Modification – An agreement between servicer and homeowner to change the terms of one’s current mortgage. This could include the term of the loan or interest rate.

Whichever is the best option for each homeowner, it’s reassuring to know there are options as the glove doesn’t fit on every hand and everyone’s situation is unique.

Photo by Mimi Thian on Unsplash

Impact

The first hurdle was getting homeowners to understand how forbearance worked and that it was not a forgiveness of any kind, they would still be responsible for the paused payments. In an attempt to keep their homes amid the uncertainty of the pandemic and their job status, homeowners willingly signed on to the relief program. However, what was designed to be a temporary fix to a temporary hardship has now been extended to 18 months with millions accumulating massive debt of missed mortgage payments. Let’s do some math to gain some perspective of what homeowners can expect at the end of 18 months.

Here we are now, with many homeowners turning over a year of unpaid mortgage costs. Take a $2000 mortgage payment to the full 18 months. Over the course of 18 months, that’s a total of  $36,000. On Oahu, Hawaii where the median home price for a single-family home reached a towering $950,000 this year, a $2000 mortgage is extremely modest. More realistically, a $3500 mortgage over 18 months would end with a full forbearance balance of about $63,000. In an ever rapidly rising housing market, such as the one we’re in now, $36,000 (or $63,000 on Oahu) may seem like just a small chunk of equity. But no matter how you look at it, it’s still a debt owed. Let’s look at the options again on how the debt can be repaid:

1. Reinstatement – What is the likelihood the average American just returning to work suddenly has $36,000 to write a check for?
2. Repayment – For those Americans already living paycheck to paycheck, imagine having to pay an extra $3000 per month for the next 12 months on top of their regular mortgage payment.
3. Deferral – Got 15 years left on your mortgage, better start saving, because in 15 years that $36,000 will all be due at once.
4. Modification – Servicers have been tailoring their own modifications and can include a change in rate and/or term. Homeowner beware with this one and be careful what you sign on to. There are many different ways to structure a modification and you want to be sure you understand exactly what you’re agreeing to.

Refinance May Be A Solution

I spoke to both Fannie Mae and Freddie Mac to confirm some questions I had about ending and extending a forbearance. Both of their websites do not yet reflect the 18-month forbearance extension, but they both confirmed it is accurate and they are honoring it. With values rising and interest rates still at record lows, homeowners can refinance “if” they meet guidelines to refinance, for example returning to make a few consecutive and on-time payments post-closing a forbearance, and have adequate employment income and credit score to qualify. This may be a sensible option to take a repayment plan or a deferral and roll that balance onto your current mortgage balance by refinancing. Again, what may work great for some may not be the best option for others. Forbearance is a solution for those who need it, but it does not come without consequence.

Facing Financial Hardship?

It’s encouraging to know that there are relief options and homeowners have choices. Although I work with all types of Buyers and Sellers, I specialize in working with homeowners facing hardship. If you are facing financial hardship and are unable to pay your mortgage, please don’t hesitate to contact me to discuss your options.