Struggling to pay your mortgage? Here’s how to get help

As the widespread economic fallout of the coronavirus continues to impact the financial health of everyday Americans, more homeowners are asking for help. By the start of May, close to 4 million borrowers were already in either government or bank forbearance programs, choosing to delay their mortgage payments for at least 90 days.

This number represents 7.3% of all active mortgages, according to Black Knight, a mortgage data and analytics firm. Together they account for $841 billion in unpaid principal and 6.1% of all loans from Fannie Mae and Freddie Mac and 10.5% of all FHA/VA loans.

If you have been financially impacted by the coronavirus pandemic and are worried about paying your mortgage, you could consider applying. The relief effort blocks lenders from starting foreclosure proceedings on federally backed loans for at least 60 days starting on March 18. Second, it gives you the option to request up to 180 days of forbearance, meaning you can either pause or reduce your mortgage payments.

Remember, though, the program does not forgive your loan. If, after six months, you’re still experiencing financial difficulties, you can request up to another 180 days. There will be no additional fees, penalties or additional interest (beyond scheduled amounts) added to your account. 

The government’s mortgage bailout program is part of the CARES Act, a relief package passed by Congress on March 27 to help Americans who are struggling with loans that are backed by Fannie Mae, Freddie Mac, the FHA, VA or the USDA, which make up about three-quarters of the mortgage market.

If you don’t have a government-backed loan, it still might pay to call your loan servicer: Most banks and private lenders are also offering forbearance programs.

While borrowers can delay their payments for up to a year, the initial period is 90 days. If you want an extension, you must contact your loan servicer to reapply. Dodging further mortgage payments will result in consequences.

Wait times with servicers were long at the start but are now down to just over 5 minutes on the phone, according to the latest survey from the Mortgage Bankers Association. Some servicers even have put the entire application process online.

The alacrity with which the entire mortgage industry had to adopt these programs was prodigious. To put it in perspective, as a result of the subprime mortgage crisis —  a nationwide financial crisis that occurred between 2007 and 2010, that contributed to the Great Recession — 8.6 million borrowers received a mortgage modification, either through government programs or private lenders. During that same period, 8.9 million homes went into foreclosure, as many of those modifications failed. The coronavirus crisis is now only in its third month in the U.S.

Still, most do not expect the same tragic outcome for homeowners and home values. The housing market was far stronger coming into this crisis, with high demand, extraordinarily low supply and strict mortgage underwriting.

“This time around we had a lot of refinancing happening in the two years leading up to this, so a large number of customers still have disposable cash, and I think that’s helping us a little bit,” said Sanjiv Das, CEO of Caliber Home Loans and former CEO of Citibank Mortgage during the subprime crisis. “However, if unemployment gets as deep as some are predicting, if it gets to the mid-teens, it could be far deeper than the subprime crisis.”

By contrast, during subprime, the housing market was overbuilt and driven by speculative investors who were pumping up prices using risky mortgage products that no longer exist.

“Following 2008, we witnessed severe house price declines, negative equity and a flood of defaults. House price declines were accompanied by a swift runup in job losses and unemployment. As a result, borrowers were not only unable to make payments in a timely manner but also unable to exit existing mortgages by selling their home,” wrote Laurie Goodman, vice president of housing finance at Urban Institute in a recent blog.

Although the program was implemented to offer relief, it has been drawing some criticism because borrowers are not required to submit documentation to prove economic hardship. They simply have to tell their mortgage servicers, those who collect their monthly payments, that they have been hurt financially by Covid-19 and need help.

“The administration made a huge mistake bringing moral hazard in, and thrust extraordinary risk into the private sector that could collapse the mortgage market,” said David Stevens, former FHA commissioner and former CEO of the Mortgage Bankers Association.

But others disagree, claiming borrowers needed swift action without the burden of a likely lengthy documentation process.

“I do not believe it is a moral hazard,” said Jay Bray, CEO of Mr. Cooper, one of the nation’s largest nonbank servicers, which already has approximately 200,000 of its loans in forbearance. “It’s not a payment forgiveness plan.”

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Home equity is now at a record high. Buyer demand plummeted at the start of the economic shutdown but is slowly beginning to climb back up. The number of forbearance requests, however, is still climbing, and some already are approaching the end of their 90-day term.

While it is very easy for borrowers to get into the government mortgage forbearance program, the end game is not as simple. There are several options, depending on a borrower’s financial ability.

Loan servicers are required to reach out to borrowers 30 days prior to the plan’s expiration date. At that time, borrowers have three options: Make all the missed payments in one lump sum, add the forbearance amount as additional payments or a lump sum at the end of the mortgage, or ask the loan servicer about setting up a repayment plan and spreading out the payments. The size of the monthly payment will be based on affordability, and documentation will need to be submitted. 

There are also several options for mortgage modifications. These can include extending the life of the loan and/or lowering the interest rate. Some of these modifications will require the borrower to submit documentation of income loss. If anyone did actually lie when requesting forbearance, this could be considered financial fraud.

For most borrowers, the forbearance programs will not hurt their credit score, as the CARES Act states that servicers cannot report this action to credit bureaus. If the loans end up in modifications, however, there can be a credit hit, and borrowers may be unable to secure a new loan on another property or a refinance for up to a year after the date of the modification.

As job losses continue to rise and the economy opens in fits and starts, it is still very unclear what the inevitable damage will be to the overall housing market and to individual homeowners. Some are predicting home values to drop by up to 4% this year, with a recovery beginning toward the end of next year. As with everything else in this pandemic, however, so much is still so unknown.

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