From Forbearance to Post-Forbearance: Navigating Forward
In 2020, we saw an unprecedented amount of change and uncertainty in all facets of our lives. The market was in flux and many Americans saw job loss and even more unfortunate, a loss in their families due to the coronavirus.
With this unprecedented loss of our economy and livelihoods, many families that owned homes that were directly impacted by the virus and the lockdowns saw themselves at a crossroad with their mortgages. Forbearances were on the rise because many families could not make the payment in full at the time and forbearance plans started to become an option for families. Typically, the forbearance option at its core consisted of making up payments in order to cover the missed payments, but the catch was that the family had to procure the payment of all the missed months and including their current mortgage payment in totality.
With COVID-19 creeping on the financial backs of families a few months into the pandemic, families wanted other options to be able to move out of the forbearance arena. Major banks that serviced these loans that went into forbearance also saw the lasting impact that this virus might bring to families and the current model had to be modified to fit the ability to payback amounts owed. This opened up repayment plan options for families to ease the burden on the amount owed during the forbearance period and mitigating a scenario where mortgages could not be payed back in some capacity.
Currently, the amount of forbearances in process (at the time of this writing) is down to 4.9% or around 2.57 million loans and the number is still continuing to fall due to expanded economic recovery.
With that in mind, how do we help those still stuck in the forbearance route that want to get out of it or are in a spot to be able to get out but are unsure how to?
First things first, we need to educate our borrowers on what forbearances are as well as the pros and cons to a forbearance. Education has been a driving force for families when it comes to taking this step and it gives borrowers a peace of mind feeling knowing the options they have in the process of what looks like an unwinnable situation.
We must also be prompt in our responses regarding forbearances. The last thing that a family needs is an air of uncertainty or mystery surrounding what is scheduled or coming up in the process on top of what is already a stressful situation. Loan servicers should be at the ready with whatever documents that are needed for non-forbearance borrowers so that they have more time free for those who need immediate assistance.
The next thing that needs to happen is to create for borrowers a roadmap to recovery regarding their forbearance. Many borrowers in forbearance think they have to secure enough to pay off the forbearance in one lump sum but because of the unprecedented amount of forbearances seen in 2020 due to the pandemic, the lenders have issued other options for repayment such as:
- Fannie Mae’s COVID-19 payment deferral option allows borrowers to defer the amount they owe to the end of their loan term (i.e., the maturity date)
- Repay the loan in one lump sum if they can (perhaps by withdrawing funds from their 401k, IRA, or other retirement plan).
- Extend the forbearance period. As of January 10, 80.45% of the loans in forbearance are in a forbearance extension.
- Take advantage of a loss mitigation plan. This may include a repayment plan to keep borrowers in their homes, or loan modifications such as writing off part of the loan or extending the terms of the original loan.
If a loss mitigation plan is the best option, borrowers will complete a worksheet to allow the servicer to assess income, the size of the loan, and whether a repayment plan or a loan modification will be the better option. If a repayment plan is the way to go, the borrower may be able to start repaying at the end of the forbearance timeline. Loan modifications may include adjusting the principal and interest (P&I) payments, extending the loan term to 30 years or beyond, and/or decreasing the interest rate. Servicers should explore these options with borrowers to determine what best meets their needs.
Finally, once a borrower that is taking the route of forbearance, the next best thing is to follow up and track the borrowers current and then ideal situation.
It's no secret that forbearances became a short norm for homeowners during the pandemics early stages. The good news is that many have since stepped out of the forbearance arena and back into a regular payment routine and we will see that as the market reopens further and individuals start getting their jobs back and in full swing. Ultimately, the goal is to set as many homeowners who happen to be in this situation up for success and that is through education, follow-up and guidance!