Nearly 40 million people in the United States have filed for unemployment since the coronavirus crisis began. One way millions of homeowners in the U.S. are ensuring they don’t fall behind on mortgage payments is by going into forbearance.
Under the CARES Act (Coronavirus Aid, Relief and Economic Security), Congress’ massive relief bill signed in March, the vast majority of homeowners can go into a forbearance agreement with their mortgage servicer, allowing them to postpone a mortgage payment for up to a year.
By May, 4.1 million home loans were in forbearance. Initially there were fears those forbearances would result in a lump-sum “balloon” payment in six months, a daunting prospect for many. However, government-backed loans, about 75% of U.S. mortgages, are allowing a borrower to pay postponed payments at the end of the loan. Under the CARES Act, many servicers are being provided relief because they’re not collecting payments.
The bottom line is nobody wants a flood of delinquencies, according to Stephanie Moulton, an associate professor in the John Glenn College of Public Affairs who studies consumer decision making regarding mortgages.
The purpose is to create stability. If a person stops making their payments, we call it a delinquency. Once they are delinquent for a couple of months, they become at risk of foreclosure, and that creates a whole cycle of problems for the person, the housing market and the investment market.
This is more akin to a natural disaster than to the most recent foreclosure crisis.
But compared to the last crisis, we were coming into this one much stronger with a period of record-mortgage delinquency rates and strong home values. Overall, credit scores for borrowers are much higher, and the mortgages were written better.
In the 2008 crisis, house prices were plummeting, and we had people highly leveraged, meaning they had taken out loans really close to or over the value of the home. Also credit scores of borrowers were much lower, so individuals were more fragile and got hit hard. It was the perfect storm.
If we’re six months from now and people are still out of work, what’s the long-term economic effect? If we still have record-high unemployment, what does the government do in that situation? Do we still have deferral options?
It’s going to depend on what happens.
But we’ve learned from the last crisis. It would be wrong to think what we saw last time is going to happen this time. It’s a different world in terms of the mortgage world now versus the last crisis.
There’s a lot of scary stories out there about some pretty draconian options, such as balloon payments.
But the first thing a person should do is absolutely contact their loan provider and see what their options are.
If the servicer isn’t being helpful, there are a lot of nonprofit housing counseling groups who were essential during the last crisis to help those in distress navigate that relationship. Certainly if they’re being told the only option is a balloon payment with their servicers, it’s probably a good idea to get a second opinion on that and figure it out.
I’d start with HUD Housing Counseling Organizations but the Ohio Housing Finance Agency has some great resources as well.
If you can make your mortgage payment, then do. If you skip your mortgage payment and don’t have a financial hardship, you may not be eligible for some of the more generous repayment options and could end up owing back all of your missed loan payments in a lump sum.
But also student loans have some forbearance options under the CARES Act. Credit cards are not covered, but some companies are offering options.
One thing a person can do when there’s a natural disaster is have a comment code added to a credit file that actually states: This account was affected by a natural disaster. That code will stay on a credit file and could help if you’re trying to rent an apartment in a year and the landlord sees you didn’t pay a credit card bill. If they get that comment code, it might show this was a legitimate reason for that missed payment.