Forbearance programs give a break to people who owe money during difficult financial times. Such a program may allow borrowers to pay less per installment or to suspend making payments altogether for a time.
The coronavirus pandemic has been an extremely turbulent period in which many households have lost work and grappled with expenses. In response, the U.S. government enacted specific rules to give relief to people carrying various forms of debt, including outstanding mortgages. However, these programs were only temporary measures.
This page will discuss how the end of mortgage forbearance measures will affect borrowers and financial institutions. Many businesses and individuals are likely to default on loans and will need to declare bankruptcy to restructure their debts. An experienced bankruptcy attorney can help companies and individuals navigate the process.
How the Covid-19 Pandemic Affected Mortgage Forbearance
The federal government backs most American mortgages. This backing can mean the U.S. government offered a loan through a program such as a Veterans Affairs loan, a U.S. Department of Agriculture loan, or a Federal Housing Administration loan. Mortgages backed by Fannie Mae and Freddie Mac are also considered to be federally-backed.
The federal government has passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act to provide various financial supports to people struggling to make ends meet during the pandemic. The CARES Act included instructions for forbearance programs to benefit borrowers with a federally-backed mortgage.
The exact mortgage forbearance details depend on the type of loan. However, in every case, borrowers were permitted to pay less than they usually would have. However, they must still repay the skipped or reduced installments, which can happen in several ways:
- A one-time lump sum covering all the waived payments
- A repayment plan added on top of regular mortgage payments
- A mortgage modification, which completely restructures the loan and combines the amount of money owed from unpaid installments with the regular future mortgage payments
Keep in mind that the lending institution may collect interest on loaned money that has yet to be repaid, even if you were granted mortgage forbearance. Typically, borrowers may try to pay back money from the forbearance period by adding the excused amount on top of the regular mortgage payment for up to 12 months.
If you are unable to afford this option, you may need to modify your mortgage permanently. This change can reduce your monthly installments, but it will also increase the time you need to pay off the debt and possibly increase the amount of interest you may owe.
Non-Federally Backed Mortgages
If you have a mortgage that is not secured by a federal program, or Fannie Mae or Freddie Mac, the mortgage forbearance program in the CARES Act does not apply to your loan.
The Consumer Financial Protection Bureau (CFPB) and other federal agencies have encouraged independent lenders to consider their own mortgage forbearance programs and other forms of financial relief for borrowers.
If you have a non-federally backed mortgage, you must check with your lender or mortgage servicer to determine what kind of long-term and short-term assistance they may provide. Some might offer forbearance and repayment plans similar to those offered to federally-backed mortgages. You might also weigh your options for restructuring your loan if you need to alter your regular monthly payments over a more extended period.
What Happens When Mortgage Forbearance Ends
Effects on Mortgage Borrowers
Borrowers with a federally-backed mortgage must repay the money they owe from the forbearance period. The exact rules will depend on the type of loan, and borrowers may pick and choose from various options.
We will look at home loans secured by Fannie Mae or Freddie Mac, which will cover many mortgaged properties. Borrowers who have secured a mortgage through the VA, FHA, or USDA have different options. Finally, the CARES Act does not apply to non-federally backed mortgages. Borrowers in that situation must discuss their options with their particular lending institution.
Repayment Options for Borrowers With a Mortgage Secured Through Fannie Mae or Freddie Mac
First, borrowers have the option of settling up their past-due payments within one year from the time they exit forbearance.
If they need more assistance repaying what they owe, they have a few options to extend their mortgage.
Borrowers may extend their total mortgage period by the same number of months they were in forbearance. For example, if the borrower was in forbearance for 12 months, they could add 12 months to their mortgage period.
They may also add the past-due amounts to the loan balance and extend the loan however long it takes to keep monthly payments at their pre-forbearance level. So if you had been paying $1,500 per month, you would keep paying $1,500 per month but make payments for a little longer to account for the unpaid forbearance installments and the interest they gain.
Borrowers with a Fannie Mae or Freddie Mac mortgage may also add the forbearance amount to the loan balance and extend the mortgage out to a flat 40 years.
Effects on Banks and Other Mortgage Lenders
Banks are bracing to take a hit once mortgage forbearance programs wind down. Many households went into forbearance on their home loans, especially compared to the forbearance rates for auto loans and credit card debt.
Lending institutions are having a hard time estimating how many people will be able to settle up their forbearance payments and on what kind of schedule.
Mortgage forbearance participants did not have to demonstrate financial hardship to qualify for the CARES Act program. Many households likely accepted mortgage forbearance out of an abundance of caution, and those borrowers are likely to be able to repay what they owe. Other households struggling with job loss, underemployment, and illness may not be able to resume regular payments, let alone pay the extra money they owe from the forbearance period.
At the peak of the mortgage forbearance period in June 2020, 8.6% of mortgage borrowers were in forbearance. At the beginning of 2021, 5.5% of borrowers—2.7 million accounts—were still in forbearance.
Industry observers say the households still in forbearance are likely to have the most challenging time catching up on payments. Financial experts are preparing for a “forbearance cliff” when the program ends, and those accounts begin to default.
The End of Mortgage Forbearance Will Drive Many Pennsylvania Businesses and Residents To Default on Loans
Nearly $200 billion in loans were in forbearance at the peak of the coronavirus pandemic. About half that amount was still in forbearance at the end of 2020, even after the economy began to pick up.
Bank leaders are already trying to identify reserves to cover their losses once forbearance programs end. Financial officials do not know just how many people will default, but they expect defaults on debts in the order of billions or tens of billions of dollars.
While many mortgage accounts are for family homes, other people are likely to default on business venture loans. Bankers worry about loans taken out to secure office buildings, retail spaces, and hotels since those industries have taken a beating since the coronavirus pandemic forced people to stay home.
The CARES Act specifically addressed mortgage forbearance, but it also laid out procedures for other forms of economic relief, including assistance for people carrying debt from auto loans or credit card purchases. Bankers are waiting to see the cumulative effect when all these programs end in Pennsylvania and around the country. Many households are likely to default on loans, and many may need to declare bankruptcy.
Unfortunately, the pandemic has also affected the nation’s legal system. The judiciary was already difficult to navigate, and it has only become more confusing now that so many people are filing for bankruptcy and court officials try to handle more bankruptcy services remotely.
An experienced bankruptcy attorney can help you make sure all your paperwork is filed correctly and on time, whether it needs to be submitted on paper or electronically. If you are worried about debts or are at risk of defaulting on loans like your mortgage, it is essential to work quickly to get credit agencies to leave you alone and even offload some of the money you owe. By acting fast, you could also avoid foreclosure, eviction, or car repossession.
Call the Experienced Staff at the Siddons Law Firm for Help Filing for Bankruptcy in Pennsylvania
If you are concerned about keeping up with mortgage installments, credit card payments, or other expenses once the forbearance period ends, you might want to consider filing for bankruptcy. By doing so, you can restructure your debt in a more affordable and straightforward way to track.
Contact the Siddons Law Firm to speak with an attorney who has experience handling Pennsylvania bankruptcy cases. It is always wise to hire a bankruptcy attorney to fight for the maximum amount of financial protection to which you are entitled. It is even more important to seek out their services amidst a pandemic.
Call our offices today at (610) 255-7500.