Curve

Homeowners who need forbearance aren’t using it. Those who don’t, use it freely. What gives?

Peter Miller
The Mortgage Reports contributor

Delinquency and forbearance numbers don’t add up

Mortgage delinquency rates are soaring. That might seem reasonable in an economy where millions of people are out of work, but there’s a conflict.

Many borrowers facing hard times can avoid delinquency. They can call their lender and ask for forbearance. It’s a way to reduce or even stop monthly mortgage payments for as long as a year.

So what gives? Why are so many homeowners missing mortgage payments when forbearance is so easy to get?

And even stranger: Why do millions of homeowners have forbearance plans when they don’t need or want them?


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Mortgage delinquency rates during COVID-19

It’s no surprise that mortgage delinquency rates have increased. In a nine-week period, 38.6 million people officially joined the unemployment rolls.

At the same time, Black Knight reports that 3.6 million homeowners were delinquent as of the end of April.

According to Black Knight, this is “the largest single-month increase ever recorded, and nearly three times the previous single-month record set back in late 2008.”

But the reality is that delinquency numbers should be much lower.

That’s because the government has created a way out for most borrowers. The trick? Forbearance.

How to avoid mortgage delinquency

If you’re a mortgage borrower, you want to avoid delinquency. It can result in late fees and credit dings.

If you’re delinquent two or three times in a row, the lender can typically begin foreclosure proceedings. That means lots more fees, big credit score declines, and maybe even the loss of your home and bankruptcy.

Forbearance is a way to avoid delinquencies. You call the lender and, in today’s world, explain your situation and how it relates to the coronavirus.

Forbearance is a way to avoid delinquencies. All you have to do it call you lender and work out a plan to relieve payments during COVID-19.

You can then work out a short-term loan modification. The lender might accept lower payments for a few months. Or, it might allow you to skip payments altogether for up to a year.

Just remember: With forbearance, you’re not getting free money. You still owe the lender for any skipped or reduced payments.

You might be able to pay them back with a repayment plan after forbearance ends, or by adding the new debt to the end of the mortgage term.

>> Related: How to request mortgage forbearance under the CARES Act

Protection from foreclosure is only temporary

The CARES Act prevents foreclosure for any homeowner with a mortgage insured, guaranteed, or owned by the FHA, VA, USDA, Freddie Mac, or Fannie Mae.

That means the majority of homes can’t be foreclosed on for up to 12 months, which might make delinquency seem a lot less scary.

“This foreclosure and eviction suspension allows homeowners with an Enterprise-backed mortgage to stay in their homes during this national emergency,” said Mark Calabria, director of the  Federal Housing Finance Agency (FHFA).

Homeowners are protected from forbearance by the CARES Act, even if their payments are delinquent. But that protection is only temporary.

However, that 12-month figure is key. Even if CARES Act protections were to be extended, this protection from foreclosure is ultimately only temporary.

Eventually, homeowners who go delinquent on their mortgages will once again be subject to consequences — including forclosure.

That’s why it’s so important to ask for help with your mortgage if and when you need it.

“Borrowers affected by the coronavirus who are having difficulty paying their mortgage should reach out to their mortgage servicers as soon as possible,” Calabria added.

“The Enterprises are working with mortgage servicers to ensure that borrowers facing hardship because of the coronavirus can get assistance.”

Why are there delinquencies when forbearance is easy?

Why are so many homeowners becoming delinquent when forbearance is so easy to get under the CARES Act?

Part of the answer is that not all loans are covered by the CARES Act.

For instance, jumbo mortgages are excluded. The same is true with non-qualified (non-QM) mortgages and “portfolio loans” — mortgages which lenders keep and do not sell on the secondary market.

But a bigger problem may be that some borrowers do not understand the CARES Act and how it protects them.

  • Google search trends show a huge spike in people asking “Do I have to pay my mortgage in a state of emergency?” It’s a new subject for millions of borrowers with generally good credit, individuals who never thought they would miss a payment
  • Many borrowers may believe that forbearance is automatic. It isn’t. You must call the lender to get a forbearance
  • Lastly, it is possible that people don’t know about the CARES Act, how it protects them, or how to start the forbearance process

Asking for forbearance or loan modification may seem complicated. But for most borrowers, it’s as simple as a phone call to your mortgage servicer (the phone number on your monthly mortgage statement).

Not only are lenders required by law to help most borrowers, but it’s actually in their favor to do so.

Even if your mortgage isn’t protected under the CARES Act, call your servicer if you expect you’ll have trouble making payments.

That’s because lenders do not want the hassle and bother of delinquencies. And they really don’t want foreclosures. Foreclosures can mean huge lender costs and take years to resolve in some states.

So even if your mortgage isn’t protected under the CARES Act, call your servicer if you expect you’ll have trouble making payments. There’s a good chance they’ll be willing to work with you to find a solution.

70% of homeowners regret using forbearance

It might seem strange that borrowers in need of financial help have not contacted lenders to work something out.

But even stranger is the reality that many of those with forbearance plans don’t necessarily need help.

A recent LendingTree study found that just 5% of those enrolled in forbearance programs would not have been able to make their mortgage payment.

Meanwhile, “almost 70% said they could’ve made their payments, but just wanted a break from their normal payments,” said LendingTree.

“…almost 70% said they could’ve made their payments, but just wanted a break from their normal payments.” –LendingTree

And, according to the study, “72% of those who received forbearance reported feeling at least a little guilty about it.”

This brings home the fact that forbearance isn’t meant to be a budgeting tool. Rather, it’s a fallback for people who really need it because they can’t make mortgage payments right now.

So, how do you know if you should ask your loan servicer for a forbearance plan?

How to know if you really need forbearance

While forbearance is surely better than delinquency and foreclosure, it’s not without costs.

Here are a few things to consider if you’re wondering whether you should ask for a forbearance plan:

  • Mortgage money not paid now will come due at some point. Be careful with forbearance plans that lower or eliminate monthly mortgage costs today but mean higher costs in the future
  • Weigh your actual need against the consequences of forbearance
  • If you really need a break from your mortgage payments, contact your servicer immediately
  • Consider alternatives to forbearance, such using retirement cash or money from a home equity line of credit (HELOC) to cover mortgage costs. Speak with a fee-only financial adviser or tax professional for advice

>> Related: Before entering mortgage forbearance, read this

Mortgage forbearance recap

Forbearance is available for those who need it, but it’s not automatic.

If you need a break from mortgage payments, you can’t expect forbearance to be automatically applied. You must contact your servicer.

Luckily, forbearance is super easy to apply and qualify for under the CARES Act

Plan ahead. Do not let a missed payment happen before you ask for forbearance. You may not have protections in that case against credit dings or late payment penalties.

And, ultimately, protections for homeowners during COVID-19 are only temporary. So make sure you ask for help if you need it in order to avoid harder consequences when those protections end.