Life After Forbearance
Let’s begin with the financial facts. As the festive season approaches, about a half a million more U.S. homeowners are coming out of their 18-month, pandemic-related mortgage forbearance periods.
All told, about 15% of U.S. mortgage holders opted to put their payments on hold. Most are already out of their forbearance plans, but that doesn’t mean they’re out of the woods yet. Many exited forbearance without having made their past-due payments. They owe, on average, just over $14 thousand per homeowner. The Brookings Institution counts the current U.S. mortgage forbearance overhang in the tens of billions of dollars.
Can the Lending Industry Meet the Challenge?
Under the stimulus bill called the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), mortgage holders, upon their own request, got access to a 180-day forbearance plan. Now that the time has wound down, mortgage services continue to work with borrowers. Options include deferring the past-due bills until the end of the mortgages, or modifying loans and reducing mortgage payments.
Updates For Borrowers Backed by Freddie Mac and Fannie Mae
Unless the market crashes, Freddie Mac and Fannie Mae are “well-positioned to bear” forbearance losses and can “continue performing their role of providing liquidity, stability, and affordability to the mortgage market,” according to the Federal Housing Finance Agency Office of Inspector General (November 3, 2021; see PDF). This message is reassuring news for mortgage companies and clients dealing with conventional loans.
Conventional lenders can’t insist on a balloon payment to recover all the outstanding debt at once. They have to assist borrowers coming out of forbearance arrive at a workable repayment plan.
Borrowers should review the terms of Freddie Mac’s and Fannie Mae’s Flex Modification, or the Freddie Mac Enhanced Relief RefinanceSM Plan. They can also review current options for leaving forbearance as explained at the Consumer Financial Protection Bureau website, and call their own mortgage servicers to discuss the best way forward.
Updates on Government-Backed Loans
Homeowners with government-backed loans can face particularly stressful situations. As FHA and other government-backed loans have lower minimum credit scores and down payments, they can be helpful tools for first-time buyers, gig workers and the self-employed, and minority home buyers. These buyers have a heightened vulnerability to serious economic downturns.
They do have new forbearance options if they’ve recently been impacted by the virus or its newer variants. This is in addition to previous options (some no longer open) that enabled borrowers to:
- Seek agency-specific assistance such as the Partial Claim plan from the U.S. Department of Veterans’ Affairs or other government agencies. The VA describes it as “a temporary program to help veterans return to making normal loan payments on a VA-guaranteed loan” once the household comes out of pandemic-related forbearance.
- Request loan modifications. This could mean getting an interest-free loan, deferring outstanding debt until the end of the mortgage, drawing out the mortgage term to lower the monthly payment obligation, or shaving up to 25% off monthly payments.
Many homeowners have come off forbearance in recent weeks, returned to a normal payment schedule, postponing the missed payments to the mortgage’s end. A smaller number received loan modifications and others continue to work with their mortgage services to lay out their paths ahead.
Struggling borrowers may still request help, and must call their mortgage servicers to learn what type of arrangements are possible. For some borrowers, sorting it out won’t be easy. Some who are coming out of forbearance recount having called up their loan servicers only to be placed on hold for hours, or winding up with different loan servicers entirely. Reports also note a lack of clear information for borrowers on what option is actually within reach, and whether they are really approved for it.
What Disparate Outcomes Mean for U.S. Homeownership
Some borrowers will not be able to avoid foreclosure once forbearance ends. They might try to take advantage of the hot market to sell their homes, then rent or share housing while waiting for the market to cool before rejoining the ranks of owners.
That cooling process could take a while. The financial data firm CoreLogic lowballs the expected rise in property values in 2022, predicting “home prices will increase on a…year-over-year basis by 1.9% from September 2021 to September 2022.” But Fannie Mae’s new forecasts have home prices rising nearly 8% in 2022. Other predictions are higher.
Some homeowners couldn’t sell if they wanted to. They simply don’t have enough equity in their homes to sell now, and they also can’t afford to buy or rent anywhere else. They have to find ways to cope financially in their current homes, and try to lower their monthly mortgage burden. For older homeowners, this can mean passing mortgage debt to the next generation.
☛ When a mortgage borrower passes on, the heirs often take over the monthly payments. See more at: What Happens If the Mortgage on Your Home Outlives You?
The Consumer Financial Protection Bureau is acting in a watchdog role, working to make sure struggling borrowers get the support they need at this time. Mortgage servicers are hiring people to tackle a rising workload, and streamlining the onboarding processes for the various assistance options. That said, foreclosures can resume, as long as the companies follow the rules.
This is piling on the stress for many low-income and non-white borrowers. It’s well known that these homeowners have been impacted by Covid-19 employment changes at a higher rate than white mortgage holders. But the disparity is more striking than we might think. The Federal Reserve Bank of Philadelphia is reporting that nearly a third more non-whites faced the inability to pay monthly mortgage loans during the time of lockdowns. And now, as the enhanced federal unemployment benefits wind down, is a higher default rate coming?
☛ Black borrowers have long paid more money for their home loans. Why? Learn more in our Update: Black Homeownership 2021.
Managing the Hurt
As we publish this article in late 2021, some 1.5 million of all U.S. mortgage borrowers are behind on their mortgages by three months or more. If there weren’t any forbearance, research suggests we’d have a larger crisis, with about 2 million more mortgages winding up in default. Forbearance has been effective. Yet the havoc wreaked by a tiny virus has left many homeowners in precarious states of debt as 2021 draws to a close.
Homeowners are urged to contact their mortgage companies to learn about possible relief. But that doesn’t mean the path ahead will be easy for the hardest-hit borrowers.
Supporting References
Jonnelle Marte and Katanga Johnson for Reuters: Vulnerable U.S. Homeowners Face Uncertainty as Mortgage Forbearance Ends (Oct. 15, 2021; citing Black Knight’s Monitor and Brookings Institution research).
Susan Cherry et al. for the Brookings Institution: Government and Private Household Debt Relief during Covid-19 (PDF of PowerPoint presentation dated Aug. 2021).
Deeds.com: The Mortgage Moratorium Winds Down — Really, This Time (Sep. 21, 2021).
FHFA Has Determined that the Enterprises Can Absorb the Full Cost of CARES Act Mortgage Forbearance Administrative Inquiry (PDF), OIG-2022-001 (Nov. 3, 2021).
Core Logic Economy Team: U.S. Home Price Insights (Nov. 2, 2021).
U.S. Consumer Financial Protection Bureau: Mortgage Forbearance Ending? Time to Take the Next Step.
Photo credits: Liza Summer, via Pexels.