Mortgage forbearance – the good and the not so good

There are so many housing market hot topics these days that you need a helicopter to say above them. One that’s of interest to homeowners and real estate professionals is mortgage forbearance.

It can be the lifeline for some. At the same time, it can be the financial equivalent of throwing gasoline on the fire.

Simply put, forbearance is an agreement between a homeowner and their mortgage company that allows the borrower to reduce or delay payments for a set time. It is NOT loan forgiveness, and the pitfalls walk hand-in-hand with the benefits.

Many homeowners are among those who do not have much of any or no emergency fund.  A recent Bankrate.com survey found just 40% of Americans can cover an unexpected $1,000 expense, under normal circumstances. That was before the coronavirus pandemic delivered a gut punch to the local economy and jobs market.

At the end of last year, almost 10,000 Tri-Cities area homeowners were already underwater with their mortgage meaning people were at least 30 days delinquent.  Making us a target-rich environment for forbearance in the wake of the economic chaos with which we are now struggling.

As of the writing of the article, almost 16,000 Northeast Tennessee workers had filed an unemployment claim. The layoffs driving those unemployment claims and a shallow financial backup plan is sending some homeowners scrambling to make ends meet. One of the first coronavirus pandemic relief programs was an offer to homeowners mortgage forbearance.

The biggest problem with some forbearance agreements is the balloon repayment. For example, a three-month forbearance would result in all three back mortgage payments plus any fees due at the end of the three months.  Here is what that could look like based on the average mortgage payment for a median-priced home in the Tri-Cities. The payment is $700 a month. After three months, the homeowner owner owes $2,106 plus any fees all at once. If you have been a good on-time paying customer up to this point, you might be able to extend the loan term and add the missed payments to the overall loan balance.

Fannie Mae, Freddie Mac, and the Federal Housing Administration say they never require bowers to make lump-sum payments. Some lenders also work out repayment plans.

The bottom line for homeowners who go the forbearance route is to understand the repayment requirements fully.

 A Realtor.com® report on the topic said, “Financial experts are urging homeowners to weigh forbearance options carefully. ‘If you can make a payment, make the payment now,’ mortgage broker Rock Andrews, president of the National Association of Mortgage Brokers, told Realtor.com®. ‘Don’t take forbearance if you don’t absolutely need it. It will become due, and who knows what happens between now and them.’”