A tsunami of deferred debt about to make landfall
Only one week after New Orleans enacted a citywide stay-athome order in March 2020, Laura Landry was hospitalized with COVID-19, putting her out of work. Before she could recover, she was furloughed from her jobs as a nail technician and hotel employee.
When she found out she could enroll in forbearance — a provision that allowed those with federally backed mortgages and facing COVID-19-related hardships to defer their monthly payments — she took the opportunity. But now she owes over $20,000 on her home, and her forbearance ends next month because the federal ban on foreclosures expired Saturday.
Ms. Landry is one of about 1.8 million homeowners still in forbearance as the safety net is removed. About a fifth of them will not be able to extend their forbearance past September, and 1.5 million more are at least three months behind on their mortgage without the protection of a forbearance plan.
Those who aren’t forced out will still be displaced if selling is their only option, and an estimated 1 in 10 borrowers in forbearance will not have enough equity to sell.
And while Congress approved $10 billion in federal assistance to help homeowners pay off debt, the program is moving so slowly that protections are expiring before states have figured out how to distribute the money. In the meantime, the White House announced July 23 many homeowners with federally backed mortgages may be eligible for a reduction in their monthly mortgage payment.
In New Orleans, the rate of forbearance is higher than in any other major metro area as of July 6, according to Black Knight, a data analytics firm that focuses on real estate. About 7% of borrowers are taking advantage of the program, twice the national share of about 3.5%. Baton Rouge, about 80 miles northwest of New Orleans, ranked secondhighest on forbearance rates.
“For them to allow us to do the forbearance, it was a blessing,” Ms. Landry said, “but then when you think you got to make all those payments all at once again eventually, that’s when reality wakes you up.”
While those who remain in forbearance are only a small fraction of the nation’s 53 million estimated total borrowers — and a significantly smaller share than the 7.25 million borrowers that entered forbearance throughout the pandemic — they are the most likely to be left in debt.
“This is just more of the Kshaped recovery,” said Diane Thompson, senior adviser to the acting director of the Consumer Financial Protection Bureau (CFPB). “The ones who are left [in forbearance] are by and large people who aren’t paying, can’t pay and haven’t made payments for a very long time.”
About a third of homeowners were never eligible for forbearance due to having mortgages that weren’t federally backed. (The moratorium applied only to mortgages backed by the Department of Housing and Urban Development, the Department of Veterans Affairs, the Agriculture Department and the Federal Housing Finance Agency.)
Other homeowners may not know about forbearance or may have received inaccurate information on their eligibility. Even for those in forbearance, mortgage servicers may not be adequately communicating all possible options to homeowners for resolving debt.
“There’s a really big problem with servicers not accurately explaining the post-forbearance options, such as loan modification to permanent deferral, all of those things that are necessary to bring the loan current,” said Sarah Mancini, a staff attorney at the National Consumer Law Center.
Over half a million homeowners had exited forbearance by June 15 but were still delinquent, according to Black Knight data, probably because they reached their maximum allowance of one year. (Some servicers allow forbearance plans of up to 18 months; others 12.) Almost 200,000 of them had not made arrangements with their lenders for repaying the debt or modifying their loan.
A new rule adopted by the CFPB requires mortgage servicers to review an application from homeowners before initiating a foreclosure in 2021, which allows homeowners to explore all possible options for resolving debt, including selling the home, pushing the debt to the end of the loan or reducing the monthly payment.
But the CFPB’s protections don’t go into effect until Aug. 31. This leaves a month for mortgage servicers to initiate foreclosures on those not in forbearance. An estimated 900,000 homeowners who will exit forbearance by the end of the year will face foreclosure only as a last resort, along with those who aren’t foreclosed on in August.
As homeowners exit forbearance, they may now be considered for monthly payment reductions, depending on who backs their mortgage under new federal measures that “require or encourage” servicers to offer borrowers these options, according to a White House news release. The reductions could be up to 25% in borrower’s principal and interest payments, the main component of a monthly payment. Others may be able to defer the debt to an interestfree loan at the end of the mortgage.