Under the federal Coronavirus Aid, Relief, and Economic Security (CARES) Act, homeowners with a federally backed mortgage loan who’re experiencing a financial hardship, which is due directly or indirectly to COVID-19, can get a forbearance—a suspension or reduction in mortgage payments—for up to 360 days, almost a year. Homeowners have been quickly taking advantage of the ability to get this suspension, and forbearance requests grew by 1,896% between March 16 and March 30, 2020. But what happens when those forbearances end? A forbearance isn’t the same as loan forgiveness; borrowers will still owe the amounts they skipped paying once their forbearance period is over.
Usually, the missed amounts can be repaid in one of the following ways:
- in an out-of-pocket lump sum
- with a repayment plan in which the borrower resumes paying the regular monthly amount, plus a portion of the overdue sums until the loan is caught up, or
- through a modification in which the lender adds the unpaid amounts to the balance of the loan.
Some servicers are already telling people that they’ll have to pay the skipped amounts in an out-of-pocket lump sum when the forbearance period finishes, on top of that month’s regular monthly payment. When throngs of borrowers can’t afford that kind of immediate expense, a lot of them will probably be headed towards foreclosure.
Getting a loan modification is the best option for most people. To obtain one, you’ll have to submit an application to your servicer and go through an evaluation (unlike with a CARES Act forbearance). But if thousands of homeowners all apply for loan modifications at about the same time, servicers might not be able to handle the onslaught. The foreclosure crisis that preceded the last recession revealed that servicers didn’t have the capacity to deal with multitudes of homeowners who needed immediate mortgage relief. There’s no indication that they’re any better prepared to deal with a deluge of requests for help this time around either.
Also, the primary responsibility of a mortgage servicer is to collect payments from borrowers. The servicer then distributes (“remits”) the part covering interest and principal to the loan owner, called an “investor.” When borrowers stop making their mortgage payments, like during a forbearance period, servicers are usually still required by their servicing contracts to continue remitting money to investors. Many servicers don’t have enough capital available to continue to make these remittances when the cash flow from borrowers stops. As a result, some servicers could go out of business.
When a servicer closes up shop, borrowers’ loans are then transferred to another company. But transferring loans is a complicated and time-consuming process. If servicers start to fail, the scale at which mistakes could occur will likely hamper borrowers’ efforts to save their homes from foreclosure. Borrowers’ loan modification applications, payments, and other important items will probably get misplaced—especially if high volumes of loans are being moved around. In the confusion of a transfer, the new servicer might mark borrowers as being delinquent when they’re in a forbearance period, damaging their credit. If people are in the process of requesting loss mitigation, they might have to start over. Or mortgage payments might get lost or misapplied. All of which can lead to increased numbers of foreclosures. A similar situation happened when servicers and lenders went out of business during the last foreclosure crisis.
Since then, laws have gone into effect to improve the process of transferring loans between servicers, as well as to ensure that borrowers are treated fairly in the loss mitigation process. But the economic downturn resulting from coronavirus will be the first time these newer laws are put to the real test. If servicers aren’t up the challenge of handling borrowers’ requests for assistance—or don’t provide any viable foreclosure-avoidance options—we very well could see a massive surge in the number of foreclosures across the country.