Saturday, April 25, 2020

The Government's good intentions is setting people up to lose their home.

 A mortgage forbearance is easy to get but think twice. 

by Rod Williams - The economic hardship resulting from the Coronavirus will result in a lot of people unable to make their mortgage payments.  As a result, all homeowners with a  government backed mortgages are to be offering a forbearance if they have an economic hardship "directly or indirectly" caused by the Cova 19 epidemic.  This applies to VA, FHA, Fannie Mae, and Freddie Mac which is about 65% of all home loans.  Futhermore, one does not have to prove their hardship is caused by the epidemic;  the mortgage servicer is to take the word of the borrower. No documentation is required.

This sounds good and for many people it is but what does it mean?  A forbearance is simply a temporary suspension of payments for a short period of time.  During that period of time, the payments simply accumulate and at the end of the forbearance period the lump sum amount of the missed payment and the next month's payment becomes due. 

Obviously, it is not realistic to expect that someone who could not make their payments, will at the end of the forbearance period be able to bring their loan current. At the end of the forbearance period the mortgage company is to consider other options to bring the loan current. The name of what they call it and the details may differ depending on which entity insures your loan but they are similar options. Here they are:
  • Extending the forbearance. The initial forbearance is for six months. It may be extended for another six months. If the borrower ask for it, the servicer is to give it.
  • Repayment Plan. At the end of the forbearance period if the borrower can afford to resume full payments and a set amount per month toward the arrearage they will be offered a repayment plan.  I have not been able to determine the length of the repayment plan but based on prior experience, I would be surprised if I would last more than a year.  If that is the case and one had the forbearance for six months then one would have a repayment of one an half payments each month.  Few people can afford that. 
  • Partial Claim. The month before the end of the forbearance period the servicer (mortgage company) is to evaluate the borrower for a "COVID-19 National Emergency Standalone Partial Claim." The way the public thinks of a "partial claim," is "moving the missed payments to the end of the note." The reason it is called a "partial claim" is that what actually happens, in the case of FHA loans, is that the mortgage lender files a claim for the missed payments with the insurer of the loan (for instance FHA), the insurer pays the missed payments and the borrower then owes the insurer (FHA if an FHA loan) the amount paid on their behalf to the lender. That amount does not become due until the first mortgage is paid off. 
  • Modification. If one is not eligible for a stand alone partial claim then one is to be evaluated for other options. Which means, basically a modification combined with a partial claim.  So, the partial claim would be applied, that is, the missed payments put to the end of the note. Then, if the owner could not afford the regular payment, the loan could be recast stretching the loan back out to thirty years.  That might lower the payment enough to make it affordable. Any other options are options in which one loses the house.
The extension of the forbearance will be easy to get. However, all that does is create a bigger problem to solve at the end of the forbearance period. The repayment plan, the partial cliam or the motification are not automatic; one has to qualify. To be eligible for the repayment plan you have to be able to afford it and to be eligible for a partial claim or modification you must meet these requirements:
  • Have been current or less than 30 days past due as of March 1, 2020.
  • Be able to resume making on-time payments.
  • Live in the home.
So, if you were behind on your house payment prior to this crisis, you won't be eligible any options for keeping your home except a repayment plan. 

To "be able to resume making on-time payments," has specific meaning. You may think you are able to do so but you may not meet a lender's definition.  You have to qualify. Ratios as to housing debt and total debt as a percentage of income apply.  So, if you return to work but are making considerably less than you were before you lost your job, you may not qualify as being able to afford the house payments.  If you have excessive debt you may not be able to qualify. If you have two car payments, that may be too much debt. 

My advice to homeowner's struggling to pay your house payment is don't apply for a forbearance if there is any way to make your house payment instead.  For many people the extra $600 a week on top of Tennessee's $250 a week unemployments comes close to matching what they were earning prior to losing their job. When applying for the unemployment, I would suggest not having taxes withheld.  You can worry about the taxes on that money latter.  You need the money now.  

Also, get on a crisis budget. Cut! Cut! Cut! Maybe staying at home you and your spouce could get by with one cell phone instead of two.  Evaluate every debt and decide which is most important.  In my view, if income is reduced paying the house payment is more important than paying student loans. Establish priorities.  If you have two car payments if may be time to stop making the payments on one of the cars and let it get repossessed and keep the house instead. Don't be intimidated by bill collectors. Don't let the bill collector who threatens the loudest make you change your priorities.

If getting a forbearance is the only way to survive this period of reduced income, then get it. Realize however, that the debt continues to pile up and you have to repay it. Make sure you understand the ramifications of getting the forbearance. Research it or better yet talk to a HUD-approved housing counselor.

For more see these links: link, link, link.

Rod Williams is recently retired but worked for over 25 years as a housing counselor with a HUD-approved housing counseling organization. 

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