Last Updated: 5/1/2020
Over the last five weeks, 26 million people have lost their jobs—that’s about one in six workers in the country. When you’ve lost your source of income, you prioritize how you spend the scarce money you have; providing food, shelter and comfort to your family—which is most important? These are heart-wrenching decisions.
Fortunately, the Coronavirus Aid, Relief and Economic Security Act, or CARES Act passed by Congress last month, provides relief to families experiencing financial hardships due to COVID-19 and are unable to make their mortgage payments. The act mandates that mortgage loan servicers (entities that collect payments and pay taxes, insurance and investors) offer forbearance for up to six months, with the possibility to extend up to an additional 6 months. The CARES Act applies to “federally backed loans” – loans purchased by Fannie Mae or Freddie Mac, or insured or guaranteed by the Federal Housing Administration, Veterans Administration or the Rural Housing Service.
Under the CARES Act, mortgage servicers are prohibited from charging late fees or reporting borrowers as delinquent when the borrower seeks forbearance of her/his required monthly payment. But what happens when the forbearance period is over? First, it is important to understand that mortgage forbearance is not a waiver, it is a pause. That said, the good news is that you don’t have to repay it all at once – most servicers have a variety of options available to work with borrowers to repay the missed amounts.
In most cases, borrowers needing forbearance will not have the funds available to make that catch-up payment all at once. Although the CARES Act remains silent on what happens after the forbearance period expires, the agencies that govern federally backed loans have a variety of options available to help get the borrower back on schedule. Some of the options available will depend on whether the borrower has sufficient income to resume making their regular payments. In those cases, most borrowers will be able to add the missed payments to the end of the loan or have them collected as a lump sum when the loan is paid off.
If the borrower has reduced income, or was delinquent on their loan prior to the COVID crisis, other options may be available. These options may require the borrower to provide additional – but still limited – documentation to the servicer who will determine which type of modification is appropriate based on the borrowers’ new income and on the requirements of the federal agency backing the loan.
Even if you obtain forbearance, it’s important to remember that your homeowners’ insurance premium and your property taxes included in the monthly payment are still due. While the mortgage loan servicer will pay those items for you during forbearance, you will have to pay the servicer back later on. Normally that happens annually via a required process known as “escrow analysis.” In an escrow analysis, the loan servicer evaluates the shortage in the borrower’s escrow account and adjusts the payment so that there is sufficient money to recover the previous year’s shortfall and pay future taxes and insurance. This can result in an increase in your monthly payment after the annual escrow analysis. Be prepared for this, and talk to your servicer if you experience payment shock as a result.
In the end, forbearance is not a panacea and it is NOT forgiveness of debt. So, if you can possibly make your house payment you should. If you can't make your payment, it is vital to talk to your mortgage loan servicer about your options as soon as you can. They want to help you stay in your mortgage and in your house! For more information about forbearance, the Consumer Finance Protection Bureau (CFPB) provides a useful website on the subject at ConsumerFinance.gov.
J. David Motley is the President of Colonial Savings, F.A., a Fort Worth-based Mortgage Lender and Servicer. Motley served as the 2018 Chairman of the Mortgage Bankers Association (MBA), the mortgage industry’s leading advocate and central voice for legislation and regulation in the Real Estate Finance Industry.