Forbearance and Payment Deferment in The Panic of 2020
We just love it when our lender or bank says – “Because of your good pay history, you can skip next month’s payment.”
Most people understand that it’s not free money, that the “missed payment” will simply be tacked on to the “back end” of the loan.
Not so with the current rage – forbearance, as it is commonly called. In the Covid-19 Pandemic of 2020, there is more fiction that fact floating about. The main feature that people seem to hear is that they can miss 3 or even 6 house payments. They may suspect that those missed payment must be paid back somehow, somewhere, sometime. But, who’s to say for sure? We all hear that businesses are getting, in total, trillions of dollars of loans that will not have to be repaid under certain circumstances.
One of the oddest features of the new forbearance provisions in the CARES Act is that the borrower (homeowner) need NOT be financial stressed or even actually in need of financial assistance in order to qualify for it. In fact, not only does every person already qualify for the forbearance, from our intel every person who even inquires with their lender-servicer is automatically enrolled in the program. You read that right. We are hearing from our customers that many of them simply called to ask about it and found out later that they were enrolled. And, their participation in the forbearance is recorded on their credit report or mortgage pay history.
How does that happen? I believe there are two main reasons.
First and foremost – the new law requires that lenders allow it, virtually without qualification or question. None of the standard mortgage underwriting guidelines are used to determine if the homeowner even needs the program, not to mention if they qualify for the repayment or reinstatement phase of the program. More on that in a few seconds.
Secondly – and maybe foremostly – the lender-servicer effectively LOCKS DOWN your business for at least the next few to several months if you are in the program. You see, your current lender-servicer is making money off of your loan. They wouldn’t do what they do unless there was a lot of money in it. I wouldn’t either. So how is your business locked down or captured?
Here’s how. You cannot refinance that loan with another lender if you have been enrolled in the forbearance program except under narrow, prescribed conditions; and, after a certain amount of time has passed.
Your current lender-servicer will not “lose” that loan. You’re stuck with them. But, neither will your current lender-servicer refinance that loan…ESPECIALLY because they already “have” it. That’s another powerful misconception that I will address at another time – that your current lender can probably do a refinance for you cheaper and easier and better because they already “have” it. It’s total nonsense.
Exactly how the program works – per federal law – is still somewhat unclear. But, that’s how government does things. They write regulations and guidelines for how homeowners might qualify for other loans going forward AND how the forbearance affects the homeowner’s ability to get a new loan to refinance the loan which is in forbearance.
Now, forbearance is the popular word for what we are discussing. Loss mitigation, repayment plan, payment deferral and modification are some of the other quasi-technical words that Fannie Mae uses. Whatever term you use, it’s important to understand the effects of the action upon your ability to get a new, refinance loan.
First, here’s how forbearance generally works.
- The homeowner is allowed to skip 6 monthly mortgage payments.
- In the 7th month, all 7 monthly mortgage payments are due in full.
- If you cannot make all 7 of those payments – at one time – you can opt for a repayment plan.
- Your finances (income, assets, debts) are underwritten to see what payment you qualify for.
- That repayment schedule could stretch for many more months. We do not yet know the maximum number of months allowed in such a repayment plan.
- For example, if your monthly payment is $1,000, in the 7th month you will owe $6,000 (plus accrued interest) in addition to that regular monthly payment. If you can only afford to pay $200 extra per month, it will take over 30 months to “catch up.”
IMPORTANT: Customers who call to inquire are, from what we are hearing, NOT told these facts on the phone. This information comes later by mail.
Meanwhile, if you take advantage of the payment deferral, your ability to refinance your loan is jeopardized and put on hold – for at least 3 months while you demonstrate that you can and will make those payments. The waiting period could be even longer if your payments are not fully caught up.
There is some leniency to include additional outstanding balance (from those missed payments) in a refinance; but, only if the homeowner has demonstrated a pattern – three (3) months – of making the payments. Even that part is too sketchy for my comfort zone.
What about modification?
Here is something many people are not considering:
If you cannot qualify for a repayment plan or if you cannot pay all past due payments at once, your loan will be put into modification – all payments tacked on the end of your loan with accrued interest. Modification has meant, in the past, that you were ineligible to refinance your mortgage for two years. Candidly, we have no idea what the new rule will be. But, modification means that your loan is always in arrears. Your credit report will not show late payments necessarily (unless they are, in fact, made late per the new repayment plan); but, the credit report will show that your loan has been modified. And, the payoff will be more than is reported as the outstanding balance.
It’s a very unpleasant situation. But, mostly, you will not be able to qualify for a new refinance loan for many months and possibly for a new purchase loan for a “season” or period of time.
Your current lender-servicer has GOTCHA!
How does this affect people?
I work a lot with divorce. It is not uncommon that divorce decrees, upon awarding a house to one of the parties, will require that party to refinance the mortgage debt within a prescribed period of time. One of my responsibilities to the divorce lawyers and their clients is to tell them exactly how long it will take for that party to refinance. I do the loan. My office is processing and underwriting it. So, we know – in advance. That’s one of the great things we do for divorcing clients.
But, if that homeowner puts their loan into forebearance or – God forbid – if it goes into modification, the time constraints in the divorce decree could be shot to pieces.
Cannot Refi to a Low Interest Rate
As well – and totally unrelated to timing issues in divorce – if your ability to refinance your loan to the current super low rates is put on hold, then you have to simply hope that by the time your loan is eligible for refinancing, the interest rates will still be low. Rate locks expire. One cannot hold a rate indefinitely. It’s a market just like the stock market, You can’t go back and say “I’ll buy Microsoft for $5/share at the 1995 price even though it’s selling for $170/share today.”
The general lesson is this: taking advantage of forbearance will significantly affect your ability to get that home loan refinanced. And, it will – most definitely – add days, weeks, months or years to that allotted time.
Conclusion: Don’t do it unless you absolutely have to. There is nothing but temporary relief – at a real and market cost – if you do it.