Updated: Apr 16, 2020
A friend called and inquired about a forbearance. Her husband was furloughed so she is now the sole income earner in the house. They aren't desperate right now but are concerned about the future. She asked if forbearance was a good solution.
I'm also seeing a lot of posts from my lender friends about "Don't get a forbearance! It'll ruin your credit, blah, blah, blah". I did some more research into forbearances and what they are all about. I actually think forbearances might be the right solution for some homeowners. But it's important to think about why you may want to ask for a forbearance and the down sides.
A forbearance is when the homeowner asks the mortgage note holder for a temporary pause in monthly payments. Usually a bank will give a 90 days forbearance. The payments aren't cancelled. They are just pushed out after the 90 days period or added to the end of your loan term. After 90 days, banks will start with a repayment plan or start the foreclosure proceedings.
Normally a forbearance would hurt your credit score but with the COVID-19 epidemic, I'm hearing that the credit agencies won't count this event against your credit score. But, there isn't any guarantee that it won't negatively affect your credit score in the future.
A forbearance is in place to help borrowers during a short term financial hardship. Normally borrowers go through an economic hardship such as employment termination and just need some time to get past the economic hardship. Communicating with lenders about the hardship and being proactive is important. No lender wants to take back a home and will try to work with you during the hardship period.
So, back to the question at hand, "Should I ask for a Forbearance?" I think it depends all on your financial situation. If you have 6 months of reserves than maybe hold off to see if we can get this economy back on track and you can earn money again. If you don't have 6 months, then your plan of attack should be to conserve cash and contact your lender to find out the terms of the forbearance. It's better to start early than later because the sooner the lender knows about a forbearance, the quicker you can work up a payment schedule.
Contacting the lender sooner than later is also important because they are inundated right now. It will take you days if not weeks to get an answer from your lender. You can't wait until the last minute.
We are living in unprecedented times. I think open communication and attacking the problem head on is the best tactic.
WHY IS EVERYONE SCREAMING ABOUT "DON'T GET A FORBEARANCE"
The mantra on Facebook right now is..."Don't get a forbearance" I was surprised about this so I did some digging. Here is what I found out...
First, the forbearance might hurt your credit and the inability to refinance your home in the near future. Even if the government is saying that this shouldn't hurt your credit, credit agencies have proprietary algorithms on how they calculate your credit score. If you have bad credit, your lender can't get you refinanced and you may not be able to buy a home for a while.
When a borrower makes their mortgage payment it normally goes to a servicer. Servicing companies collect the mortgage, disperse funds to the note holder, deposit funds into the mortgage escrow account and communicate with the borrower as needed. When you call your mortgage company, you're probably talking to the servicer and not the note holder (investor). Servicers act as the go between for the borrower and the note holder. Some of the more common servicers are Select Portfolio Servicing, Mr. Cooper, Chase Bank, Bank of America, Wells Fargo and a handful of others.
These servicing companies make a small amount (0.2%) on each loan. That's not a lot but when you're servicing $6 billion a month, it adds up. Plus, they don't really have to do much. Answer phone calls about the mortgage account, call if the loan payment isn't made by the borrower and start foreclosure proceedings if necessary. Most of this is automated.
A forbearance normally isn't a big issue for the loan servicer. Under normal circumstances, less than 1% of the borrowers ask for a forbearance. The problem arises when many borrowers ask for a forbearance all at once. This puts a strain on the servicer and the mortgage system.
During a forbearance, the borrower might not have to make the mortgage payments but the servicer still has to make the payment to the investor who holds the note. A small number of forbearances isn't an issue for the servicer. The servicer expects a few forbearances and has reserves set aside for this. With the COVID-19 crisis, 3.4% of borrowers asked for a forbearance during the 1st week of April alone. This will increase as the economic hardships set in. Servicer's don't have this level of cash on hand to pay the note holder. This is causing chaos in the mortgage world right now.
Mortgage lenders who originated the loans also hate forbearances. If a new borrower misses their first few payments, the investor will force the originating lender to pay back the loan. So, if a borrower doesn't make the first payment on a $400,000 loan, the investor who bought the loan can force the originator to pay him back the $400,000.
Think about this...Mortgage Banker makes a loan for $400,000 to borrower. A Mortgage lender usually makes 3% on the loan amount or $12,000. If the borrower doesn't make their first few payments, the investor who gave the $400,000 loan will ask the Mortgage lender their full $400,000 plus the 3% commission back! Yikes!
With the lower rates, most lenders are refinancing like crazy. I'm talking about trillions of dollars or refinancing. The 1st payment for the refinances are due over the next few weeks and months. Think what would happen if 10% were to ask for a forbearance? It would literally shut down some of the lenders. Especially some of the smaller ones. I think this is why no lender wants you to doa forbearance.
If you can make the mortgage payment, I highly recommend you do so. It'll help your credit, force you to pay down your principal with the monthly payment and it's not like you won't have to ultimately pay back the missed payments. Plus, if the rates drop later, you can refinance and take advantage of the lower interest rates.
If you are having a financial hardship, then forbearance is the right solution. Call your servicer, explain the situation and ask for the forbearance. In times like today, cash reserves are critical so if you have to skip payments in order to keep you home, go for it.
Let me know what you guys think about this post.