Forbearance: Is It Just a Slow Slide Into Foreclosure?

Written by Jaymi Naciri Posted On Wednesday, 22 April 2020 05:00

If you’re experiencing financial hardship related to the coronavirus crisis, the idea of forbearance probably sounds pretty good. After all—who wouldn’t want to put off paying their mortgage when money is tight, especially if you’ve just lost your job or are worried you might be about to?!

The problem with forbearance is, in most cases, it only provides a short reprieve from paying your mortgage—as short as three months, depending on the lender. “Under a forbearance agreement, a borrower can pause payments entirely or make reduced payments on their mortgage,” said MarketWatch. “Homeowners with federally-backed mortgages are eligible for up to 180 days of forbearance initially under the CARES Act. At that point, if they’re still facing financial difficulty, they can request an extension of up to another 180 days of forbearance.”

And, if you don’t get caught up on those missed payments at the end of your forbearance period, you could risk losing your home. If you’re thinking about entering into a forbearance agreement with your lender, you need to read this.

Forbearance requests skyrocket

According to the Mortgage Bankers Association, requests for forbearance are up 1,896%. That’s A LOT of people looking for assistance in a trying time. And, a lot of people who could be in real trouble if they enter into a forbearance agreement and are then faced with a deadline to pay up—and an inability to do so. 

The problem is that many lenders are asking for a balloon payment at the end of the forbearance period, which means the total amount of the skipped payments has to be paid or you could be in default. But keep in mind that this balloon payment is not a mandate, according to MarketWatch. 

“Homeowners can and should aim to negotiate the best possible repayment options for them. All those terms are negotiable. Beyond a balloon payment, servicers may offer to extend the term of the mortgage and tack on the missed payments at the end, so a 30-year mortgage would be extended by 4 months if that’s how much forbearance a borrower received.”

What happens when your forbearance period is over?

Those who are still unable to make their payments, not to mention catch up with the missed payments, at the end of their forbearance period, may be able to negotiate a loan modification with their lender. It remains to be seen how responsive lenders are to the plight of homeowners once it becomes clear just how many of them are struggling/ More than likely, a wave of foreclosures is coming—despite the fact that many lenders have suspended proceedings for the time being. 

“We may see an uptick in foreclosures as a result of dramatic economic impacts, such as more homeowners losing their jobs and falling behind on mortgage payments,” said the Dallas Morning News. “It will definitely happen,” Frank Nothaft, chief economist with CoreLogic, told them. “We have seen it happen in every single recession the U.S. economy goes into.”

A new report from ATTOM Data Solutions showed that, “New Jersey and Florida have the most counties at risk of a rise in foreclosures due to economic fallout from the COVID-19 pandemic,” said Realtor.com. “On the other side of the ranking were the least vulnerable counties. Texas led the nation with 10 of the 50 least at-risk counties on the list. The Lone Star State was followed by Wisconsin, with seven of the least risky counties, and Colorado with five.”

These findings were based on data that outlined the “counties with the most foreclosure filings and underwater mortgages…in the last quarter of 2019,” and the “percentage of average local wages needed to afford the major expenses associated with owning a median-priced home, such as maintenance, in the first quarter of this year.”

How to protect yourself

Even though your mortgage likely represents your largest ongoing financial obligation and the most tempting option when it comes to not paying if you’re pressed for cash, your auto finance company, credit card companies, and other creditors may be better bets. If you’re having trouble meeting your obligations right now, the most important thing to keep in mind is that help may be there—but only if you ask for it.

“Contact your lenders, loan servicers, and other creditors. If you’re not able to pay your bills on time check their websites, to see if they have information that can help you,” said the Consumer Financial Protection Bureau (CFPB). “Credit card companies and lenders may be able to offer you a number of options to help you. This could include waiving certain fees like ATM, overdrafts, and late fees, as well as allowing you to delay, adjust, or skip some payments.”

Remember that, “Being behind on your payments can have a lasting impact on your credit,” they said, but in a desperate situation, it would be understandable if you prioritized staying in your house over paying other bills.

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