With the onset of COVID-19, we’re seeing drastic economic changes every day. Homeowners are wondering if mortgage forbearance is the only option, and it’s hard to know where to get the facts. With news about unemployment and the tightening market swirling, it’s best to check in with an expert.
Chase Hanks of Movement Mortgage has been in the lending and mortgage business for 30 years. She is working full-time to support her clients at Movement Mortgage, helping people through these times.
Get the Facts
Chase said it’s hard to get the real story on what’s going on with mortgage relief right now. The Consumer Financial Protection Bureau governs and manages loan regulations, but most of the information comes directly from lenders like Fannie Mae. It all varies lender by lender. Lenders take on the government’s restrictions and add overlays, making them tighter. Based on risk tolerance, some lenders have tightened regulations very restrictively while some are adding extra restrictions to those in danger of default.
In order to get accurate, up-to-date information, speak to your loan originator or mortgage broker. They have a direct line to your specific lender. Since regulations and restrictions are changing daily, check their social media for updates as well.
There are a few historical events that lenders and originators are looking at to try to predict the future. The post-Katrina time period is one example. Unfortunately, the current crisis is totally unprecedented. The mass nationwide layoffs and businesses closing, with an uncertain reopen date, has never happened to our modern market.
The secondary market is where most of the issues lie.When a lender closes a loan, they then bundle and sell them on the secondary market as mortgage-backed securities. On that secondary market, investors rate them and purchase the loans based on their credit quality (such as the borrower’s credit score). Investors are now pulling back and not buying lower quality loans. Thus, lenders are now upping their restrictions – they have higher standards for people seeking loans.
So, markets are restricting and investors are not purchasing loans at risk of default on the secondary market. Lenders have to hold onto those loans due to that market, which ties up their liquidity and prevents new loans. That creates a domino effect.
In a forbearance agreement, the lender pauses payments for a set period of time. This is not the same as debt forgiveness! Based on the agreement, the borrower has to pay the paused payments back in a lump sum or in larger payments in a specific period of time. Due to finances, that may not be possible. The borrower may make a new agreement with the lender to make double payments, which may not be realistic… then foreclosure proceedings may begin.
This makes mortgage forbearance a risky choice. Because borrowers are unsure about their future income, it may not make sense to promise to pay a lump sum or double payments in the future. Also, borrowers have to sign up for forbearance and make an official agreement – they can’t just stop making payments.
Soon, there may be options beyond forbearance. The federal government is working on a plan for loan relief, with forgiveness or deferment, payments added to the back end of the loan without interest. However, lenders haven’t had time to figure out how they will do this. Lenders still owe money to bond holders, and need to make their scheduled payments.
Currently, there is a lot of misunderstanding about this system. Since the government does not require the borrower to show proof of hardship, some people are entering these mortgage forbearance agreements when they don’t need to. It’s an important issue to make sure the people who really need it are getting assistance and it doesn’t cause a strangle effect on the mortgage market as a whole.
What Borrowers Can Do Today
Chase recommends that borrowers take a pause and wait before signing any agreements. If you can pay your April mortgage, pay it. Wait until the dust settles and see what other agreements the government and your lender put in place.
Warning – if you’re in a forbearance and you want cash, lenders will not allow you to refinance. So don’t rush into a forbearance agreement. Examine your ability to uphold your financial responsibility. Make a plan so you don’t lose your credit or even worse, your home. Don’t make a costly mistake.
Buying Homes Right Now?
In Western NC, it’s becoming more of a seller’s market, and people are still applying for home loans. If you have a recession-proof income and you’re safe, it’s a great time to buy. Due to restrictions, many loan programs are paused through the end of May. Jumbo loans and specialty programs like down payment assistance are paused. Lenders have higher restrictions on credit scores, but the home market is still active.