Students’ debt tied to ITT Tech will be forgiven
The Education Department announced Thursday that it will forgive student debt for more than 100,000 borrowers who attended colleges in the now-defunct ITT Technical Institute chain but left before graduating.
In a rarely used move, the agency said it will erase federal loans for borrowers who left the forprofit colleges during an eight-year window before their 2016 closure. During that period, the department said, ITT Tech lied about its financial health and misled students into taking on debt they couldn’t repay.
The action will offer $1.1 billion in loan forgiveness to 115,000 borrowers who attended ITT Tech, which had more than 130 campuses across 38 states. About 43 percent of those borrowers are in default on their student loans, the department said.
“For years, ITT hid its true financial state from borrowers while luring many of them into taking out private loans with misleading and unaffordable terms that may have caused borrowers to leave school,” Education Secretary Miguel Cardo
ment. “We will certainly find out over the coming year.”
According to projections by Zillow economists, over the next six months, several hundred thousand households will exit forbearance — paused mortgage payments — without a plan for returning their mortgage to good standing with their lenders, which puts them at risk of foreclosure. The biggest wave of forbearance exits is expected in September and October.
What is forbearance?
Homeowners struggling financially during the pandemic have been able to pause their mortgage payments for months at a time to find jobs or handle expenses.
The majority of homeowners exit forbearance after six months, said Jeffrey Ruben, president of WSFS Mortgage. But most borrowers have the option to extend if their circumstances have not improved.
As of Aug. 15, 1.6 million homeowners nationwide were in forbearance, according to the Mortgage Bankers Association. That’s
3.25 percent of mortgage servicers’ portfolios. More than 4 in 5 of those borrowers are in extended forbearance plans.
Mortgage forbearance peaked in May 2020, when there were more than 4 million cases, according to Freddie Mac.
While in forbearance, homeowners cannot refinance their loans to take advantage of historically low interest rates and lower their monthly payments.
Borrowers have to make up skipped mortgage payments. Typically, that means a lender extends the mortgage, including the skipped payments, over a longer period of time, or a lender tacks on the missed payments at the end of the mortgage so borrowers pay the lump sum when the mortgage matures.
Throughout the pandemic, forbearance “was helpful to a tremendous amount of people who needed that relief,” Ruben said.
Options for borrowers
The federal government did not renew its foreclosure moratorium, which expired in July. That ban applied to federally backed mortgages, such as those insured by the Federal Housing Administration
and those guaranteed by Fannie Mae and Freddie Mac.
But the federal Consumer Financial Protection Bureau has said mortgage companies must first evaluate homeowners to determine if they are eligible for assistance programs and offer options to borrowers before they file new foreclosure claims on most mortgages. This rule applies starting Aug. 31 and lasts for the rest of the year.
The number of residential foreclosures in Philadelphia has stayed around 20 to 30 per month, said Michael Froehlich, managing attorney of the home ownership and consumer rights unit at Community Legal Services.
“The real spike, we anticipate, is going to come next month,” he said.
Because of the strong housing market and home appreciation, homeowners as a whole are in stronger positions than they were during the Great Recession, when many people owed more than their homes were worth. Growing equity puts homeowners in a better position to work with their lenders.
“It will be a much softer landing than what we experienced in the
past,” Ruben said.
Trouble arriving now
Homeowners can still apply for forbearance. During the pandemic, some people have been draining their savings or pulling from their retirement funds to pay for their homes, so they’re just now having trouble paying their mortgages, Froehlich said.
Most homeowners who are exiting forbearance and still struggling have a few options. They can try to enter a loan modification program with their lender. They can ask for a loan deferral to push back required payments. They can sell their homes to resolve their debts.
Homeowners need to ask themselves whether they’ll have consistent income that will allow them to afford to pay their mortgage, said Chelsea Barrish, vice president of program impact at Clarifi, a Philadelphia-based financial counseling nonprofit. If not, homeowners should exhaust all their forbearance and loan modification options. Housing counselors can help borrowers understand available programs and talk through options with their lenders.
According to a Mortgage Bankers Association survey, 1 in 6 borrowers
are leaving forbearance without a plan, which puts them at immediate risk of foreclosure. Others said they planned to sell to avoid foreclosure. A Zillow analysis estimates that 20 to 25 percent of borrowers could list their homes for sale, which could increase the available national housing supply by more than 200,000 homes.
Forbearance exits will “potentially ease some of the inventory crunch we’ve seen in housing markets over the last several years,” said Chris Glynn, senior managing economist at Zillow.
But Froehlich at Community Legal Services said that “what we know is that the most affordable homes for so many of our low-income clients are the homes in which they are in.”
Ruben said a lot of WSFS Mortgage’s borrowers who are exiting forbearance are now refinancing their loans to decrease their monthly mortgage payments.
Experts advise homeowners to reach out to their lenders or respond when lenders contact them so borrowers can work out a path forward if they still need help after exiting forbearance or they need a payment plan.