Just say NO to Forbearance
April 10, 2020
Covid-19 has caused a virtual economic shutdown to stop its spread and preserve health. We will defeat this virus and our economy will begin to recover. The economic slowdown will likely cause home values to take a modest dip over the short term. But this should be viewed as an opportunity.
Just prior to the pandemic, the housing market was hot – It wasn’t uncommon to see multiple offers on the same home. Sales were at their best levels in 13 years, and every metric was favorable. There’s simply more demand than homes for sale. And the supply of homes will remain tight, while the population numbers are continuously growing. Household formations will steadily rise into the future because they are reflective of rising birth rates from the 1980’s.
While we understand that there may be a short-term decline in activity, it could provide just the right opportunity to purchase a home at a good price. During the economic recovery, it is likely that housing will lead the way, unlike the previous recession which was caused by a housing crisis.
Remember that homeownership is usually a long-term investment, with the average length of stay in the home being 10-years, so even if there is a dip, values will come back.
RATES - The open door for mortgage forbearance is causing a lot of angst in the industry, and is one of the factors on why rates won't come down much from here in the short term. It's probably the biggest issue right now post origination, and because it is crushing servicing values it is affecting rates. Once we push past this nightmare of forbearance we should see the ability for rates to improve some more.
Lenders are pricing where they need to be right now for a multitude of reasons that include reducing volumes, higher required margins to cover the costs of doing business right now, paying additional staff, building a war chest to weather this storm, etc.
BANKS, LENDERS AND INVESTORS WANT NOTHING TO DO WITH RISK RIGHT NOW. That’s why loan programs are going away and guidelines are tightening up so much.
Lenders look to only take on loans most likely to perform through this crisis. This will also reduce volume, allowing rates to come down naturally when margins can be reduced. Right now though we aren't likely to see rates drop too much, but they can (and likely will) go lower once lenders clear some pipeline.
Loans under $510,400 continue to price well (conventional, FHA, VA).
Get used to pricing that requires borrowers to put some skin in the game (paying points) especially on loans over $510,400 in CA (Arizona does not have high balance loans like San Diego does up to $701,500) . Lenders are not able to price loans with a big premium, because no one wants to get stuck with a loan that pays off early or goes into forbearance. The massive lender credits that I am typically able to give have decreased in the short term, but they should come back later this year. I still can offer lender credits, but not in the amounts I could 2 months ago on FHA and VA.
What is the main option for homeowners today that have been affected by the corona virus? Forbearnace. This is NOT always the best option and should be a last resort. Let’s dig into forbearance.
What is Forbearance? This is the primary option that Fannie Mae, Freddie Mac, FHA, VA and the USDA have made available to Servicers to provide to customers. A forbearance is a temporary suspension of the customer’s mortgage payment intended to allow the customer time to manage their financial situation. In this program, the forbearance will be for a minimum of three months. Borrowers should attempt to keep current on taxes and insurance so that these do not become past due.
Late Charge waiver: This program will waive late charges
Credit Bureau Reporting: This program will suppress derogatory credit bureau reporting.
Note that at the end of the forbearance, all payments suspended during the forbearance will be due, however, if your customer is unable to repay the suspended payments other options will be available to the customer, as long as qualified, such as a repayment plan, partial claim or a loan modification.
FORBEARANCE is NOT what you might think!!! Forbearance is not forgiveness.
Let’s do some ‘mortgage forbearance math’:
Mom and Dad have a mortgage. It's currently $2,500 per month.
Dad decides to take advantage of this OR gets laid off, calls the servicer, and asks for forbearance (all they have to say is CoronaVirus).
In one phone call, he gets 4 months "off" from paying.
Four months later, Dad is finally back to work or decides to start paying his mortgage again, but hasn't been able to save any money during the forbearance.
Forbearance is lifted on month 5 and servicer says,
"That will be $10,000 + $2,500, which is now due". ($12,500)
Dad almost passes out and says, “WHY??"
Servicer: "That's the 4 months of forbearance plus the current month.”
Dad: "I can’t do that, can we work something out?"
Servicer: "Sure, we will spread out the $12,500 over 12 months."
Dad: "Phew....ok, good. What will that look like?"
Servicer: That will be $3,541.67 a month for the next 12 months."
Dad: " OMG!!! I can't afford that."
Servicer: "Sorry....."
Dad: "Can I refinance?"
Servicer: "No because the loan went into forbearance."
Dad: "What can I do?"
Servicer: (Crickets)
In a nutshell, this is forbearance, folks. Again, forbearance is not forgiveness.
Be aware of the details of it all.
If you don’t think this is a real option for you and you have some equity in your house, we might also look to sell it now before the market gets flooded with properties for sale. If you go into default, they can start the foreclosure process. But wait, you have equity. Well that doesn’t do you any good right now. You can’t refinance if you’re out of work right now.
If you are able, just do EVERYTHING you can to continue to pay your mortgage. We will rebound from this.
Please understand the seriousness of this, and if you still have questions, you know we are always here for you.
Use this as a last resort!
People don’t even have to prove they have been affected by the coronavirus to get forbearance today. That’s where a big problem lies, some people think it’s a vacation from paying their mortgage or that it will get tacked on to the back. That would be a modification and you will not be able to refinance for 2 years or more if you get a loan modification (it differs from servicer to servicer).
Sell your toys first, before you stop making a mortgage payment. Stop ordering food to go, cook at home. Take money out of your retirement account tax free right now (up to $100,000), call your car loan and ask them for a forbearance (I know many are doing 90 days no questions asked). A forbearance on your mortgage should be your last resort.
Well what about a Repayment Plan? A repayment plan allows a borrower to pay back past-due payments over an extended period of time in order to bring the loan current. This is typically only granted to borrowers who can prove a financial need for a repayment plan because they cannot otherwise bring the loan current.
Now, what about Deferment? Deferment is when overdue payments are delayed to a later date. The balance of the loan is due on either the mortgage maturity date, the pay-off date or upon the sale of the property AND deferment is usually only available after missed mortgage payments, which affect the borrower’s credit and ability to refinance down the road.
Clarification: Government Loans & Deferrals
You may hear customers indicate that they’ve heard that deferrals are available from other mortgage companies or government officials. However, the GSEs and Government Agencies have all focused on forbearance as the option Servicers are able to provide to customers.
Some banks may use deferrals on their own bank-owned loan portfolio, however, if they service loans for the GSEs and Government Agencies they are required to follow the guidance from the GSEs and Government Agencies.
Clarification: Conventional Loans & Deferrals
Housing Wire also recently announced that Fannie Mae and Freddie Mac are adding a deferral option to their suite of loss mitigation options. The deferral program from the two GSE’s provides relief to a very narrow band of borrowers. To qualify:
· The hardship must be resolved
· The customer is unable to afford a repayment plan or full reinstatement
· The customer must be one or two payments delinquent, no more and no less
· The customer is required to make a full contractual payment during the month of the evaluation
· The loan must have been originated at least twelve months prior (so no new loans / refi’s that closed in the last 12 months)
The intent of this deferral was to provide a solution for customers that are rolling 30-days delinquent or rolling 60-days delinquent (already delinquent) and can’t afford to pay anything more than the current payment. This IS NOT a solution for customers that cannot pay today and need immediate relief.
"But I heard it on CNBC so it must be true..."
On a related topic, mortgage forbearance continues to be widely misunderstood and dramatically misreported, leaving many borrowers frustrated when they find out that they can't just "pause" their mortgage. A forbearance is not a deferment - they ARE different.
Although some borrowers will be able to get a true deferment, pushing missed payments to the end of the loan, most will not (because mortgages are securitized and they can't change the bonds).
Forbearance will require paying the missed payments at the end, or modifying the mortgage. Make sure you understand all this if you're getting calls about it - and if the people are employed and able to qualify, encourage a cash out refi over a forbearance (in my opinion). You can share this video on your social media if you like: https://originatorsuccess.fleeq.io/a/glzm11vtax-vs3t285cul?captions=1&narration=1
The reason this forbearance thing is so important is that it is causing huge concerns about "the collapse of the mortgage industry". When borrowers don't make their payment, the servicer must still pay the end bondholders. This normally isn't a problem - but you also don't normally have a global pandemic and 6.5 million people apply for unemployment benefits in a week. Servicers are not prepared to foot a bill this big, for as long as they could be facing, and need help from the government to make sure they have the money to do so. Although help has been talked about (and even promised if you believe the rumors) we haven't seen anything take hold yet. Once it does (hopefully it does), it should help open the door for lenders to move more loans, and possibly help rates come down a bit more (in the coming months, not necessarily weeks).
Non-bank loan servicers are bracing for a wave of mortgage delinquencies that could exceed $75 billion and could climb well above $100 billion; forbearance requests have already topped 2 million, according to MBA figures. These services say they don’t have the liquidity to transfer cash to mortgage securities holders as missed payments mount.
If you don’t think this is a real option for you and you have some equity in your house, you might look to sell it now before the market gets flooded with properties for sale. If you are able, just do EVERYTHING you can to continue to pay your mortgage. We will rebound from this.
Here are some articles that are worth reading. New rules and laws are obviously coming out daily, but there is also A LOT of unknown still. And servicers can make their own rules down the road after the forbearance period is up, so just know what you or your clients are REALLY getting in to.
MUST READ - How the Corona Virus Broker Mortgages - https://spark.adobe.com/page/uMzfR8BqamyTT/?fbclid=IwAR0p-Y102goVsrgied2r2kVncpDQfPgVyGkowMN2-DoVo2aQ4sD_y_XmCsk
FHA lending getting a lot stricter - https://www.forbes.com/sites/alyyale/2020/04/03/thanks-to-covid-19-fha-mortgage-lending-gets-stricter/#a0107a13d264
Servicers bracing for liquidity shortfall - https://finance.yahoo.com/news/mortgage-crisis-prompts-u-weigh-180949849.html
Coronavirus mortgage bailout: There is going to be complete chaos WATCH THE VIDEO TOO - https://www.cnbc.com/2020/04/06/coronavirus-bailout-there-is-going-to-be-complete-chaos-mortgage-ceo.html
Covid-19 has caused a virtual economic shutdown to stop its spread and preserve health. We will defeat this virus and our economy will begin to recover. The economic slowdown will likely cause home values to take a modest dip over the short term. But this should be viewed as an opportunity.
Just prior to the pandemic, the housing market was hot – It wasn’t uncommon to see multiple offers on the same home. Sales were at their best levels in 13 years, and every metric was favorable. There’s simply more demand than homes for sale. And the supply of homes will remain tight, while the population numbers are continuously growing. Household formations will steadily rise into the future because they are reflective of rising birth rates from the 1980’s.
While we understand that there may be a short-term decline in activity, it could provide just the right opportunity to purchase a home at a good price. During the economic recovery, it is likely that housing will lead the way, unlike the previous recession which was caused by a housing crisis.
Remember that homeownership is usually a long-term investment, with the average length of stay in the home being 10-years, so even if there is a dip, values will come back.
RATES - The open door for mortgage forbearance is causing a lot of angst in the industry, and is one of the factors on why rates won't come down much from here in the short term. It's probably the biggest issue right now post origination, and because it is crushing servicing values it is affecting rates. Once we push past this nightmare of forbearance we should see the ability for rates to improve some more.
Lenders are pricing where they need to be right now for a multitude of reasons that include reducing volumes, higher required margins to cover the costs of doing business right now, paying additional staff, building a war chest to weather this storm, etc.
BANKS, LENDERS AND INVESTORS WANT NOTHING TO DO WITH RISK RIGHT NOW. That’s why loan programs are going away and guidelines are tightening up so much.
Lenders look to only take on loans most likely to perform through this crisis. This will also reduce volume, allowing rates to come down naturally when margins can be reduced. Right now though we aren't likely to see rates drop too much, but they can (and likely will) go lower once lenders clear some pipeline.
Loans under $510,400 continue to price well (conventional, FHA, VA).
Get used to pricing that requires borrowers to put some skin in the game (paying points) especially on loans over $510,400 in CA (Arizona does not have high balance loans like San Diego does up to $701,500) . Lenders are not able to price loans with a big premium, because no one wants to get stuck with a loan that pays off early or goes into forbearance. The massive lender credits that I am typically able to give have decreased in the short term, but they should come back later this year. I still can offer lender credits, but not in the amounts I could 2 months ago on FHA and VA.
What is the main option for homeowners today that have been affected by the corona virus? Forbearnace. This is NOT always the best option and should be a last resort. Let’s dig into forbearance.
What is Forbearance? This is the primary option that Fannie Mae, Freddie Mac, FHA, VA and the USDA have made available to Servicers to provide to customers. A forbearance is a temporary suspension of the customer’s mortgage payment intended to allow the customer time to manage their financial situation. In this program, the forbearance will be for a minimum of three months. Borrowers should attempt to keep current on taxes and insurance so that these do not become past due.
Late Charge waiver: This program will waive late charges
Credit Bureau Reporting: This program will suppress derogatory credit bureau reporting.
Note that at the end of the forbearance, all payments suspended during the forbearance will be due, however, if your customer is unable to repay the suspended payments other options will be available to the customer, as long as qualified, such as a repayment plan, partial claim or a loan modification.
FORBEARANCE is NOT what you might think!!! Forbearance is not forgiveness.
Let’s do some ‘mortgage forbearance math’:
Mom and Dad have a mortgage. It's currently $2,500 per month.
Dad decides to take advantage of this OR gets laid off, calls the servicer, and asks for forbearance (all they have to say is CoronaVirus).
In one phone call, he gets 4 months "off" from paying.
Four months later, Dad is finally back to work or decides to start paying his mortgage again, but hasn't been able to save any money during the forbearance.
Forbearance is lifted on month 5 and servicer says,
"That will be $10,000 + $2,500, which is now due". ($12,500)
Dad almost passes out and says, “WHY??"
Servicer: "That's the 4 months of forbearance plus the current month.”
Dad: "I can’t do that, can we work something out?"
Servicer: "Sure, we will spread out the $12,500 over 12 months."
Dad: "Phew....ok, good. What will that look like?"
Servicer: That will be $3,541.67 a month for the next 12 months."
Dad: " OMG!!! I can't afford that."
Servicer: "Sorry....."
Dad: "Can I refinance?"
Servicer: "No because the loan went into forbearance."
Dad: "What can I do?"
Servicer: (Crickets)
In a nutshell, this is forbearance, folks. Again, forbearance is not forgiveness.
Be aware of the details of it all.
If you don’t think this is a real option for you and you have some equity in your house, we might also look to sell it now before the market gets flooded with properties for sale. If you go into default, they can start the foreclosure process. But wait, you have equity. Well that doesn’t do you any good right now. You can’t refinance if you’re out of work right now.
If you are able, just do EVERYTHING you can to continue to pay your mortgage. We will rebound from this.
Please understand the seriousness of this, and if you still have questions, you know we are always here for you.
Use this as a last resort!
People don’t even have to prove they have been affected by the coronavirus to get forbearance today. That’s where a big problem lies, some people think it’s a vacation from paying their mortgage or that it will get tacked on to the back. That would be a modification and you will not be able to refinance for 2 years or more if you get a loan modification (it differs from servicer to servicer).
Sell your toys first, before you stop making a mortgage payment. Stop ordering food to go, cook at home. Take money out of your retirement account tax free right now (up to $100,000), call your car loan and ask them for a forbearance (I know many are doing 90 days no questions asked). A forbearance on your mortgage should be your last resort.
Well what about a Repayment Plan? A repayment plan allows a borrower to pay back past-due payments over an extended period of time in order to bring the loan current. This is typically only granted to borrowers who can prove a financial need for a repayment plan because they cannot otherwise bring the loan current.
Now, what about Deferment? Deferment is when overdue payments are delayed to a later date. The balance of the loan is due on either the mortgage maturity date, the pay-off date or upon the sale of the property AND deferment is usually only available after missed mortgage payments, which affect the borrower’s credit and ability to refinance down the road.
Clarification: Government Loans & Deferrals
You may hear customers indicate that they’ve heard that deferrals are available from other mortgage companies or government officials. However, the GSEs and Government Agencies have all focused on forbearance as the option Servicers are able to provide to customers.
Some banks may use deferrals on their own bank-owned loan portfolio, however, if they service loans for the GSEs and Government Agencies they are required to follow the guidance from the GSEs and Government Agencies.
Clarification: Conventional Loans & Deferrals
Housing Wire also recently announced that Fannie Mae and Freddie Mac are adding a deferral option to their suite of loss mitigation options. The deferral program from the two GSE’s provides relief to a very narrow band of borrowers. To qualify:
· The hardship must be resolved
· The customer is unable to afford a repayment plan or full reinstatement
· The customer must be one or two payments delinquent, no more and no less
· The customer is required to make a full contractual payment during the month of the evaluation
· The loan must have been originated at least twelve months prior (so no new loans / refi’s that closed in the last 12 months)
The intent of this deferral was to provide a solution for customers that are rolling 30-days delinquent or rolling 60-days delinquent (already delinquent) and can’t afford to pay anything more than the current payment. This IS NOT a solution for customers that cannot pay today and need immediate relief.
"But I heard it on CNBC so it must be true..."
On a related topic, mortgage forbearance continues to be widely misunderstood and dramatically misreported, leaving many borrowers frustrated when they find out that they can't just "pause" their mortgage. A forbearance is not a deferment - they ARE different.
Although some borrowers will be able to get a true deferment, pushing missed payments to the end of the loan, most will not (because mortgages are securitized and they can't change the bonds).
Forbearance will require paying the missed payments at the end, or modifying the mortgage. Make sure you understand all this if you're getting calls about it - and if the people are employed and able to qualify, encourage a cash out refi over a forbearance (in my opinion). You can share this video on your social media if you like: https://originatorsuccess.fleeq.io/a/glzm11vtax-vs3t285cul?captions=1&narration=1
The reason this forbearance thing is so important is that it is causing huge concerns about "the collapse of the mortgage industry". When borrowers don't make their payment, the servicer must still pay the end bondholders. This normally isn't a problem - but you also don't normally have a global pandemic and 6.5 million people apply for unemployment benefits in a week. Servicers are not prepared to foot a bill this big, for as long as they could be facing, and need help from the government to make sure they have the money to do so. Although help has been talked about (and even promised if you believe the rumors) we haven't seen anything take hold yet. Once it does (hopefully it does), it should help open the door for lenders to move more loans, and possibly help rates come down a bit more (in the coming months, not necessarily weeks).
Non-bank loan servicers are bracing for a wave of mortgage delinquencies that could exceed $75 billion and could climb well above $100 billion; forbearance requests have already topped 2 million, according to MBA figures. These services say they don’t have the liquidity to transfer cash to mortgage securities holders as missed payments mount.
If you don’t think this is a real option for you and you have some equity in your house, you might look to sell it now before the market gets flooded with properties for sale. If you are able, just do EVERYTHING you can to continue to pay your mortgage. We will rebound from this.
Here are some articles that are worth reading. New rules and laws are obviously coming out daily, but there is also A LOT of unknown still. And servicers can make their own rules down the road after the forbearance period is up, so just know what you or your clients are REALLY getting in to.
MUST READ - How the Corona Virus Broker Mortgages - https://spark.adobe.com/page/uMzfR8BqamyTT/?fbclid=IwAR0p-Y102goVsrgied2r2kVncpDQfPgVyGkowMN2-DoVo2aQ4sD_y_XmCsk
FHA lending getting a lot stricter - https://www.forbes.com/sites/alyyale/2020/04/03/thanks-to-covid-19-fha-mortgage-lending-gets-stricter/#a0107a13d264
Servicers bracing for liquidity shortfall - https://finance.yahoo.com/news/mortgage-crisis-prompts-u-weigh-180949849.html
Coronavirus mortgage bailout: There is going to be complete chaos WATCH THE VIDEO TOO - https://www.cnbc.com/2020/04/06/coronavirus-bailout-there-is-going-to-be-complete-chaos-mortgage-ceo.html