Beware of CARES: After Mortgage Forbearances, Some Servicers May Require Full Immediate Repayment
The CARES Act was passed by Congress to require the majority of mortgage servicers to offer forbearances to homeowners facing financial hardship from the novel coronavirus (COVID-19) pandemic. A forbearance is a voluntary agreement by your bank or mortgage servicer to not require monthly mortgage payments for a period of time.
These forbearances can last up to a year. What was not addressed in the CARES Act, however, was what happens when the forbearance ends. What happens to all the mortgage payments that are unpaid?
It is troubling that many mortgage companies have already said they will require full immediate repayment of all mortgage payments at the end of the forbearance. This will be difficult or impossible for most homeowners.
The CARES Act was passed by Congress at the end of March 2020 as a result of the almost complete economic shutdown of the U.S. economy. As we all know, this was caused by the “social distancing” and “stay at home” orders passed by many states and municipalities. These have helped save lives but have had the side effect of making many unable to work, and, consequently, to have difficulty paying their bills.
Forbearances are the solution to mortgage payment difficulties. At least, that’s what Congress seems to think. To guard homeowners against foreclosure, the CARES Act gives two major forms of relief: prohibition of foreclosure for 60 days, and mortgage forbearances of up to a year. The forbearances and foreclosure protections are a good solution – at least in the short term.
What is not addressed in the CARES Act is what happens after the forbearances are over. News reports have highlighted banks’ statements that at the end of the forbearances, all the months’ payments must be paid in a lump sum. Failure to do so would result in foreclosure.
Here’s an example. Say your mortgage payment is $2,000 per month. You are laid off and apply for a six-month forbearance. During that time, no payments are due. You receive unemployment for a few months and are one of the fortunate ones who gets a job by the time six months are up. When the forbearance ends, your mortgage servicer tells you that you need to immediately pay $12,000 for your six months of missed payments – or else they will initiate foreclosure.
That’s clearly an unfair situation. If you had the ability to save the money needed for the payments, you would not have needed the forbearance. But that’s the outcome that may happen for many homeowners.
What is the solution? Don’t despair, there is hope. The majority of mortgage investors have loan modification programs in place. After your forbearance, you will probably be required to submit financial documentation to show that you can now afford your mortgage payments. Some loan modification programs, like the Flex Modification Program, aim to reduce your monthly payment by 20%. This is offered by both Fannie Mae and Freddie Mac, who collectively own about half of mortgages. If your income has not decreased, you may be able to resume paying your same mortgage payment.
More solutions are likely. Though COVID-19 took many off-guard, even Congress (who usually cannot agree on anything) acted within a matter of a couple weeks to pass the CARES Act. Once everyone has had a chance to catch their collective breath there will probably be more loan modification programs, more forbearances, and more guidelines about what banks and mortgage servicers can (and cannot) do when these programs end.
If you are struggling with your mortgage because of COVID-19, or for any other reason, contact us to see if we can help. We have helped numerous homeowners to get their mortgages back on track and save their homes from foreclosure.