Forbearance offers relief for homeowners, with risks
Millions of homeowners are delaying payments on their mortgages, taking their cue from a CARES Act provision that allows for suspended payments and eases the credit-report consequences of missing them. But like many seemingly free lunches, there could be some not-so-obvious negative consequences with this one.
The CARES Act offers a break for homeowners struggling amid the coronavirus economic downturn, including those who have been thrown out of work. The legislation can give certain homeowners nearly a year of breathing room by allowing them to suspend payments without having those missed transactions reported to credit bureaus.
Some 7.9% of homeowners with loans, nearly 4 million overall, had taken advantage of mortgage forbearance as of May 3, reported the Mortgage Bankers Association. That was almost double the rate in March.
“This sounds like a great idea,” said Dave Timmerman, a mortgage banker at American Financial Lending in Phoenix. “But it comes with strings attached.”
Relief options vary
Under the CARES Act, borrowers facing hardships from the pandemic may request that their mortgage payments be suspended for up to 180 days, with an extra 180 days available later if they continue to need help. These options are required only on government-backed mortgages, though many private lenders and servicing companies — the ones that collect payments — offer assistance, too.
Each mortgage lender or servicer has its own rules on forbearance and for ultimately getting back on track, Timmerman said. Some will tack the missing payments onto the back end of the mortgage, effectively lengthening the loan period or possibly boosting the monthly payment for a year or two.
Others might insist that you make up the missing sum right at the end of the forbearance period, creating a potential cash crunch for borrowers.
A new forbearance-focused website
hosted by the federal Consumer Financial Protection Bureau, developed with assistance from various government housing agencies, explains provisions of the legislation. It’s at consumerfinance.gov.
Borrowers must contact their servicing company if they want to request payment relief and, later, explore repayment options at the end of the forbearance period.
As noted, one choice — possibly a favorable one — would be resuming regular monthly payments and adding a modest extra dollar amount over a year or two to make up for the missed payments, said Consumer Reports.
There’s also the possibility of a formal loan modification, a process under which payments would be lowered but extended further into the future. With a modification, homeowners might need to submit pay stubs, income-tax returns and other documentation, as they would with a new mortgage application, Timmerman said.
Even having to pay the entire amount at the end of the forbearance period, a balloon payment, could apply in some cases on loans not backed by the government, according to the CFPB.
Mixed impact on credit
The CARES Act prohibits lenders on most loan types from reporting missed
payments to the three credit bureaus, but this relief applies only during the forbearance period, Timmerman said.
Regardless, the resulting void in your credit history could be a signal to future lenders that you were having trouble. That’s because creditors generally report “on-time” payments as they’re made for credit cards, auto loans, mortgages and so on.
“With deferment, you won’t be reported delinquent,” Timmerman noted, but payments would be missing from your transaction history. A lender for a new loan “will wonder where they are,” he said.
In other words, “Even though your credit scores may not be negatively affected, those missing payments will very likely affect your ability to get a new mortgage in the future,” Timmerman said, with the impact possibly lingering for years.
“This consequence isn’t being communicated” to borrowers, agreed Nicole Rueth at Fairway Independent Mortgage in Englewood, Colorado.
The good news with forbearance is that it won’t affect borrowers’ credit reports and scores directly, Rueth said. But just by calling a loan servicer to inquire about forbearance — even if you don’t go ahead with it — could result in a notation being recorded on your credit report, she said, possibly making future loans harder to obtain.
“Even by making inquiries, without agreeing to anything, people could be placed into a forbearance category,” she said.
Rueth worries that applying for forbearance could harm the ability of some homeowners to satisfy potential emergency liquidity needs later by not being able to refinance in a pinch, for example.
The CARES Act, she said, didn’t account for Fannie Mae and Freddie Mac guidelines that state anyone in forbearance must become current again on payments and then wait 12 months before they can secure new financing.
Your situation might not improve
The logic behind forbearance is to provide some financial breathing room for people temporarily impacted by the outbreak through job losses, reduced income and the like. But unless you’re fairly certain your financial situation will improve, other options might be better such as raising your income by renting out a room, selling the property or tapping into other money spigots such as a retirement account.
Skipping mortgage payments doesn’t relieve you of the general obligation to keep making payments for property taxes, property insurance and homeowner association dues, if applicable. “You still have to make those other payments,” Timmerman said.
Nor does it excuse you from making up the unpaid mortgage amounts.
“With forbearance, you still will owe the payments that you missed,” warned the Consumer Financial Protection Bureau. “Forbearance doesn’t mean your payments are forgiven or erased.”
Rueth said she considers forbearance to be a last resort, though it’s sometimes portrayed as a good option by lenders and others.
Timmerman said he’s worried about people deferring payments without understanding all that’s involved, including those who might not really need the relief but view it as a government handout of which they should take advantage.
If it’s a matter of feeding your family ... “you do what you need to do,” he said. “But if you have the ability to make your normal mortgage payments, I highly recommend you do.”