Times are uncertain, so skipping a few mortgage payments sounds nice, right? Not so fast.
In response to the economic turmoil caused by the Covid-19 pandemic, Congress passed an unprecedented 2.2 TRILLION dollar financial aid package for Americans. Known as The CARES Act, it aims at relieving businesses and individuals from economic hardships, including provisions to allow folks to request mortgage payment forbearance for the next several months. Awesome, right??!! Not so fast.
The intentions of this policy were wise, as a mortgage payment is often the single largest monthly expense for households. But, the unforeseen ripple effects of hundreds of billions of dollars in delayed payments has the potential to cripple the entire mortgage industry, put homeowners in perilous financial positions, cause grave damage to the overall economy.
To explain the economics of this issue, I’ll briefly touch on lessons of history, politics, English, and zoology. I know its long, but please take the time to understand the full story and the negative consequences you and society at large may face if pursuing mortgage payment forbearance.
First, A Bit of History
On March 27th, President Trump signed The CARES Act, a package of profound financial aid to Americans. The last time the federal government swooped in to save the economy, it was 2008 and TARP (“Troubled Asset Relief Program”) was passed to primarily bail out large (ie-“too big to fail”) banks in the midst of the “Mortgage Meltdown.” There was much criticism about how big banks were saved but the “little guy” was left out in the cold, so today’s policy makers didn’t want to repeat that same formula. The CARES Act is more focused on small businesses and individuals, and includes direct cash payments as well as the option to request to defer payments for the next 6-12 months without proof of financial hardship. As long as the mortgage is backed by a government entity, the mortgage servicer must honor the request. But, what the mortgage servicer must also honor is the monthly funds owed to the mortgage bond holders. In a nutshell, mortgage companies have to keep paying money out even though money is not coming in. YIKES!
Mortgage servicers will be facing incredible cash crunches and have repeatedly asked policy makers to establish a lifeline allowing mortgage servicers to borrow money from The Federal Reserve Bank to keep money flowing through the system. Without this form of aid, the mortgage industry as we know it could die.
Next, A Little Politics
As of this writing, the most influential politician on this matter insists that government intervention is not yet needed. Mark Calabria, the appointed director of Federal Housing Finance Agency (FHFA) who directs Fannie Mae & Freddie Mac, has a track record of disfavoring the government coming to the rescue in turbulent times. In fact, he’s gone on record to say if he were in charge during the Mortgage Meltdown of 2008 he would have let the very institutions he currently leads fail! Moreover, Mr. Calabria recently estimated “2 million borrowers would seek forbearance requests by May” and suggested if mortgage servicers get in trouble they could always sell their mortgage accounts to the larger mortgage servicers. Mr Calabria is either tragically miscalculating or misinformed on both fronts.
According to the Mortgage Bankers Association, the industry already processed well over 2 million requests by early April, and this number will only increase as our economy struggles to fully bounce back from shutdowns. Furthermore, the two largest mortgage servicers in the country, Wells Fargo & Chase Bank, have established policies in the last week to drastically reduce the amount and types of new mortgage
s they are willing to take on. There is no way the larger mortgage outfits will be a backstop to these new kinds of toxic mortgages with payment forbearance. Since the payment forbearance phenomenon was not created by the free markets, the free markets are not able to be the solution. Government intervention is essential, and at this time support to mortgage companies is only being offered to loans related to VA & FHA, which is a very small minority of the overall mortgage market.
Siri, What Does Forbearance Mean?
Unless you have a Jeopardy-sized vocabulary, forbearance is not a word you use often. Oxford dictionary says its “the action of refraining from exercising a legal right, especially enforcing the payment of a debt.” Simply put, forbearance does not mean forgiveness. Mortgage companies may temporarily refrain from collecting your payments, but they won’t hold back any longer than legally necessary, and likely won’t play nice when that time comes.
Survival Instincts Will Take Over
With inevitable liquidity issues and no sign of an immediate parachute from the federal government, mortgage servicers have impossible decisions ahead of them. Sadly, I believe this will force mortgage servicers to avoid favorable forbearance agreements at all costs. They will only play as nice as necessary to follow the law, but be ruthless otherwise. If you went through a short-sale or loan-modification process during the last housing recession, you know exactly what I’m talking about.
For example, there are no rules that govern when these deferred mortgage payments are re-paid. Even this video from the Consumer Finance Protection Bureau is vague. Potential options your mortgage servicer may offer: 1.) tack the payments on at the end of the loan; 2.) spread the missed payments over a period of time; or 3.) demand the payments be made in a lump sum.
What would you do if you ran out of cash and someone was overdue on a loan due to you? You’d force them to play catch up ASAP, right??!! Its not greed. Its not nasty. Its survival.
Mortgage servicers will do the same thing, forcing a homeowner who skipped payments at, say, $2000/month for 3 months & now pay $8000 in a lump sum in the 4th month. Obviously, most folks who truly need the payment relief in the coming months likely won’t be in a position to make a single catch-up payment, but tragically mortgage servicers are not in a position to float millions of skipped payments over the next few months and then patiently wait for reimbursement at the end of a 30-year loan. They have been backed into a corner, and will use any means necessary to try and survive.
I remain optimistic that policy intervention and clarity will eventually calm this situation down, but until it does every mortgage servicer is in a choke hold.
What Should I Do?
If you have suffered a big economic loss and cannot make your mortgage payment, by all means call your mortgage company and request payment forbearance. Yes, this may mean you are forced into a lump sum payment at some point, but that is tomorrow’s problem. You have bigger problems today; take the payment relief and hope repayment options are more favorable when you’re back on your feet.
BUT, if you are still able to make your mortgage payments, please continue to do so. Consider taking advantage of the delayed tax filing deadline (extended 90 days to July 15th!), but don’t delay making your mortgage payments unless absolutely necessary. Staying out of forbearance will allow you to keep your options open for refinancing if rates slip down (forbearance generally disqualifies you from getting a new mortgage) & will help you avoid a build-up of payments that will likely need to be paid all at once in the future. It is not only in your best interest, but also in the best interest of the mortgage industry and our country at large. If too many borrowers utilize payment forbearance, the mortgage system could face catastrophic failure that would result in a housing crash worse than the Mortgage Meltdown of the late 2000s.
Spread The Word, Not The Virus
Please pass this post along to as many friends and family as possible, and do your part to encourage folks who have been considering mortgage forbearance to know the full story. In the meantime, stay safe, stay inside, and stay sane!