Posted on April 27th, 2020
It’s Monday and I’ve got some good news for homeowners regarding mortgage forbearance.
This morning, the Federal Housing Finance Agency (FHFA) announced, or rather reiterated, that homeowners currently in forbearance with a Fannie Mae- or Freddie Mac-backed mortgage are not required to pay back all the missed payments in one lump sum.
Rather, they’ll be given more practical options to get back on track, such as a repayment plan or a loan modification to ensure it’s affordable once the country reopens again.
Why the Lump Sum Repayment Fears?
- Lenders often require mortgage forbearance to be paid back in one lump sum
- So if you miss six payments all six are due once the forbearance period ends
- There had been early reports of banks/lenders telling borrowers this
- Obviously it’s not practical for many homeowners who are out of work because of COVID-19
In normal times, banks and mortgage lenders offer mortgage forbearance to homeowners as one of their many loss mitigation tools.
However, this solution is usually only good for a month or two while the homeowner either sorts out their financial issues or the loan moves into default then foreclosure.
This isn’t a normal time. There are literally millions of homeowners either out of work or laid off because of the coronavirus, through no fault of their own.
At last glance, about six percent of mortgages were in a forbearance plan, and more than eight percent of homeowners with an FHA loan or VA loan were in a similar boat.
The problem this time around is the CARES Act allows for up to 12 missed mortgage payments, as opposed to say one or two.
While a homeowner with temporary struggles could perhaps make up one or two missed payments, the chances of being able to make up six or 12 at once seems impossible at best.
As I’ve said before, many Americans don’t even have one-month’s reserves set aside for an emergency, so six or twelve? Forget about it.
The Alternatives to Lump Sum Repayment
- Those who are able to will be asked to repay the shortfall all at once
- Homeowners who can’t may be put on a repayment plan to catch up gradually
- If unable to pay more due to sustained loss of income a loan modification may be a solution
- It may also be possible to extend the forbearance plan if necessary
FHFA director Mark Calabria clearly stated the following this morning: “No lump sum is required at the end of a borrower’s forbearance plan for Enterprise-backed mortgages.”
This covers both Fannie Mae- and Freddie Mac-backed mortgage loans, which most homeowners hold.
While the missed payments will have to be paid back by the borrower eventually (they aren’t simply skipped or forgiven), there is now clear guidance spelling out what happens next.
Those who opt for forbearance will be contacted by their mortgage servicer roughly 30 days before the end of the forbearance plan.
If the temporary hardship has been resolved, they will discuss a variety of repayment options, including the following:
– a repayment plan to gradually catch up by paying extra each month
– a loan modification where missed payments are added to the end of the mortgage
– a loan modification that reduces the borrower’s monthly mortgage payment
Instead of paying back all the missed payments, homeowners will be given the chance to gradually catch up on the payments not made.
This can be accomplished via a repayment plan, whereby the missed payments can be added to the normal monthly payments.
So if you typically pay $2,000 a month, and you missed six payments, that $12,000 may be broken down and added to subsequent monthly payments until repaid in full.
Alternatively, the loan servicer may offer a loan modification that extends the loan term and re-amortizes the loan to make monthly payments more manageable.
There is also payment deferral, where past due amounts are paid off at the end of the loan in one lump sum so payments do not increase.
For those still struggling after forbearance is scheduled to end, a loan modification that lowers the borrower’s payment is a possibility.
In other words, paying even less than you had been before forbearance, despite owing even more due to missed payments.
Lastly, if the hardship hasn’t been resolved, it’s possible the forbearance plan may be extended.
In summary, there are lots of affordable options once a homeowner exits forbearance, and the FHFA wants folks to know this so they don’t worry or avoid requesting forbearance if needed.
Just keep in mind that mortgage relief provided by individual banks/lenders on loans they own may play by different rules.
About the Author: Colin Robertson
Before creating this blog, Colin worked as an account executive for a wholesale mortgage lender in Los Angeles. He has been writing passionately about mortgages for nearly 15 years.