Understanding Mortgage Forbearances and COVID Forbearance Plans
Table of Contents:
What is a mortgage forbearance?
A forbearance is an agreement between a borrower and their mortgage lender that allows the borrower to temporarily pause their mortgage payment.
Sometimes, a forbearance allows the borrower to pay their mortgage payment at a reduced rate for a certain period of time, but forbearances are most commonly used to pause mortgage payments for a fixed period of time.
Individual lenders have different programs for forbearance plans and each program could be slightly different, but forbearances typically do not change any terms of the original loan. They do not remove the obligation to pay the principal, interest and other escrowed payments that a borrower is obligated to pay. It’s simply an agreement to pause the obligation for a fixed amount of time.
The 4 pros of a mortgage forbearance
The 4 cons of a mortgage forbearance
How does a forbearance plan affect foreclosure activity?
Most of the time, if you enter into a forbearance agreement with your mortgage lender, the lender will not move your loan into a default status during the forbearance period. Typically, the lender will not move forward with any foreclosure activity during the agreed upon timeframe as long as you start your forbearance when you are current on your mortgage.
Generally, a forbearance will not be available to you if you are already in default on your mortgage. If foreclosure activity has already started, typically banks will not approve a forbearance. If they do approve a forbearance after you are in default, you need to be tracking your foreclosure activity carefully. Consult with an attorney if you’re someone who wants a forbearance but has already missed payments.
How do I decide if a forbearance is a good decision for me?
Below is a useful three-part test to decide if a forbearance may be a good fit for you:
Below please find an example of someone who may want to ask their bank for a forbearance:
Bob has a job where he uses both of his hands every day. Suddenly, he injures one hand in a way that requires one month of recovery. During recovery, he is out of work, not being paid. For this month, he’s lost his income but the injury is relatively minor and his employer guarantees that they will let him get back to work once his injury heals.
In this case, a forbearance may be a good option for Bob. He gets one month off of having to pay his mortgage but he has a guaranteed job to return to and his hand injury is healing. There isn’t any permanent change in the status of his household income once he goes back to work. So, Bob asks his bank for a 30-day forbearance. He takes a break for one month while he recovers and then, once his forbearance is over, he resumes making his payments.
What should I be aware of when I request a forbearance from my mortgage lender?
The most important thing to be aware of when you request a forbearance form your mortgage lender is to understand what is expected of you at the end of your forbearance term.
For example, if your lender agrees to give you a 6-month forbearance, you want to have solidified in writing what is expected of you at the end of the 6-month period.
Most of the time, at the end of the 6-month forbearance period, you are allowed to simply resume making mortgage payments without having to pay anything else. This is the standard way forbearances end.
However, sometimes lenders require that the full amount you did not pay during the forbearance period be paid at the end of the forbearance period, meaning, if you paused making mortgage payments for 6 months, the lender may be expecting a full 6 months paid at the end of your forbearance period.
Sometimes, lenders won’t require the full amount you missed during the forbearance period but they will require that the interest be paid at the end of the forbearance period for the missed payments. For example, if you paused payments on a 6 month forbearance, at the end of the 6-month period, the lender may ask you to pay 6 months worth of the interest you missed in addition to resuming your regular full payment.
So, it is not enough to simply ask your bank for a forbearance. You need to get them to agree, in writing, about the terms of the forbearance in order to make sure it is explicitly clear what your obligations will be at the end of the forbearance period.
What is a COVID-19 forbearance plan?
Once COVID -19 hit and millions of people were forced to stop work, the government issued mandates that required banks to give forbearance plans for people with federally-backed mortgages with an eye toward ensuring that mass amounts of Americans did not lose their homes to foreclosure while they were out of work.
For most federally-guaranteed loans (FHA, Freddie Mac, Fannie Mae etc), forbearance plans up to 12 months should be available for people experiencing COVID-related financial issues.
How do I get a COVID-19 forbearance plan from my lender?
We are seeing the forbearance plans be given and enforced in different ways. Most lenders are able to approve a qualifying homeowner for a forbearance plan with no documentation over the phone. Banks such as Loancare, M&T, PHH, Bayview, Carrington, US Bank, Caliber Home Loans, Mr. Cooper, Bank of America, Wells Fargo, PennyMac, SPS and SLS are putting homeowners on COVID forbearances without requiring documentation.
You should be able to call and ask for a forbearance citing COVID related hardships and you should be given a 3-month forbearance at a minimum.
If the bank is pushing back on your ability to get a COVID-related forbearance with just a phone call, you may want to contact an attorney for some assistance.
Are there any problems with the COVID-19 forbearance plans?
There is little structure in place to help homeowners transition out of a COVID forbearance at this time.
Lenders were not specifically directed how to manage the ends of the COVID plans in much detail. Some plans from banks such as Fay Servicing and Flagstar are requiring full payment of all missed payments at the end of the period.
Some lenders are automatically mailing borrowers loan modification offers at the end of their COVID forbearances. A loan modification is a way for a borrower to pick up making regular mortgage payments. The amount they missed during the forbearance typically gets tacked on to the end of the loans.
Other lenders are starting to put people through loan modification review at the end of forbearance periods; however, this solution is ripe with problems. Most bank’s loan modification application processes are long and complicated. Some homeowners are being asked to provide packages of documentation to show that they are not able to repay the amount they forbeared. With the massive amount of homeowners struggling because of COVID, phone lines at the lenders are clogged and the loss mitigation teams that handle loan modifications for the lenders are overrun with people needing help. Many homeowners are getting trapped in never ending document cycles or having their modification reviews closed.
Other lenders are simply not engaging with homeowners at the end of their forbearance period. They are putting the burden on the homeowners to reach out to find out what their options are.
If you are someone trying to transition out of a COVID forbearance, I strongly recommend you contact an attorney in your State for help if you have not received an automatic partial claim or loan modification from your bank at the end of your forbearance period.
What is a COVID-19 partial claim?
A partial claim is a no interest, zero fee subordinate lien that gets recorded on Title following a forbearance plan (and some FHA loan modification plans). The amount of the partial claim is determined by the amount of arrears you accumulated during your forbearance plan. It gets recorded and becomes due on the maturity date of the loan. This was proposed by the government as a way to help people not have to pay the full amount they missed during their COVID forbearance. The bank records a partial claim for the amounts you missed and then you just resume making regular mortgage payments. It’s a way to simply resume making your regular payments while still paying the bank what you missed when the loan matures.
These are currently being applied to FHA loans.
How do I request a COVID-19 partial claim?
The partial claims were supposed to happen automatically but they are being applied inconsistently right now so if you believe you have an FHA loan and participated in a COVID-19 forbearance, you need to expressly state to your bank both on the phone and in writing that you’d like to take advantage of the COVID-19 partial claim program. Individual banks are handling these differently and some banks are not handing these out automatically, so make sure you prioritize speaking with a bank representative about this option early. Try to talk to your bank about your partial claim before your forbearance expires.
Call your bank and then draft a request in writing. Fax the request in writing to their loss mitigation department and then call daily to follow up.
What happens if I get stuck in a forbearance plan that requires full payment at the end of the forbearance period and I can’t pay it in full?
If the full amount becomes due at the end of your forbearance plan and you can’t pay it, you likely need to apply for a loan modification or a repayment plan with your bank. This requires you to go through a loss mitigation negotiation to see if the bank will agree to write you a new loan. The goal would be to get a loan modification where the bank takes the amount you owe and tacks it on to the end of a new loan so you can resume making regular payments.
Another option would be to apply for a repayment plan where the bank allows you to resume making regular mortgage payments plus an agreed-upon extra amount for a certain amount of time until you are brought current on your loan.
5 things to be aware of if you’re trying to transition out of a forbearance plan to a loan modification or repayment plan option