Almost six per cent of mortgage loans are in forbearance, meaning about three million homeowners have delayed payments, according to data released this week by the mortgage bankers' trade group. That's a 60 per cent jump from the prior week, and industry observers estimate that the number of loans in forbearance could eventually climb to as high as 15 per cent.
So who's postponing their mortgage payments? Congress's relief legislation, the CARES Act, just says that borrowers can suspend payments for up to a year without penalty if they've experienced a financial hardship related to Covid-19 -- but they don't have to actually provide any verification to qualify.
It's reasonable to think that a portion of borrowers who have already stopped making payments, or who may do so in the future, are in a bit of a gray area when it comes to hardship. They may not have lost their jobs but fear they will shortly. Or they want to preserve cash amid concern over reduced bonuses or depleted brokerage and retirement accounts. While it's understandable, choosing to delay payments before it's absolutely necessary comes with some important risks that need to be considered.
The CARES Act provisions on mortgage forbearance, which only apply to federally backed loans, don't stipulate how or when the delayed mortgage payments have to be repaid. The government agency backing the loan generally provides those guidelines.
Fannie Mae and Freddie Mac have said borrowers have several options for repayment currently, including making a lump sum payment, entering a repayment plan or modifying their loan. Even if borrowers aren't required to make up six or 12 months of mortgage payments in one lump sum, lenders are obviously going to want their money back as soon as borrowers are able.
Which brings up another point: Documentation isn't required to be eligible for forbearance, but once borrowers are in the midst of it, it's safe to assume mortgage servicers are going to be looking for paperwork and details to inform the repayment options they're offering. Stephanie Moulton, an associate professor at Ohio State University who studies housing and consumer finance policies, says she thinks most borrowers will be on the hook to have a plan in place to make up their payments within a year of deferral.
For borrowers with big mortgages in expensive markets like New York City – the jumbo loans of $766,000 or more -- their ability to postpone payments will be up to their lenders, since the CARES Act doesn't cover them. Data from the mortgage bankers' trade group show that 6.4 per cent of loans that aren't backed by the federal government, which include jumbos, were in forbearance as of April 12.
So it's clear that those borrowers are applying for and receiving mortgage-payment suspensions. But in contrast to government-backed loans, there's no guarantee that applicants can get their payments delayed. The terms are likely to be case by case with limited rights for borrowers.
Repayment options may depend on whether the lender is a bank or non-bank, with banks that keep those loans on their books likely to be more generous with their terms. Sara Singhas, director of loan administration at the Mortgage Bankers Association, says she thinks a 90-day repayment period will be typical for non-agency loans.
Also, borrowers who are in mortgage forbearance can't refinance their loans, points out Laurie Goodman, co-director of the Urban Institute's Housing Finance Policy Center. Mortgage rates are near record lows and expected to stay relatively low for the foreseeable future. For those looking to save money, the smarter move may be to simply refinance their loans.
Another thing to remember: Most people tend to pull a single housing payment from their checking account, with a portion going toward the loan's principal and interest, and another portion going into an escrow account for property taxes and homeowners' insurance. Experts I spoke to say homeowners who don't have escrow accounts set up are still responsible for paying their property taxes and insurance premiums, even if they're delaying their mortgage payments.
And finally, perhaps the most important consideration is that forbearance is intended for those who truly need it. Taking it prematurely or unnecessarily will add to the stress loan servicers are facing, from answering calls to making payments to bondholders (they're on the hook for principal, interest and property taxes and insurance premiums for those with escrow accounts). Servicers were granted some relief this week, but that doesn't mean there won't be liquidity issues and broader repercussions for the housing market if too many borrowers stop payments before it's absolutely necessary.
Credit has already started to tighten for home equity loans and new mortgages -- and could get worse. Today's non-essential mortgage forbearance takers could be denied home loans the next time they're looking to borrow. - Bloomberg