Photo by David Hilowitz via Flickr. CC BY 2.0
When Nora Hertel’s husband lost his job working at a small, private school for kids with special needs earlier this year due to the pandemic, their two-income household was instantly scaled down to one. Hertel, a marketing communications specialist at NCALL Research Inc., says she and her husband initially paid their mortgage with money from savings. As months passed, however, the couple started to miss their 15-day grace period and receive penalties.
“It was just getting to the point that by the time I paid the mortgage, the next bill would come in,” Hertel recalls. “And then there were times that I would pay the mortgage and then end up late on my credit card and other things. We just didn’t have enough and I had to choose one or the other.”
For homeowners like the Hertels, the CARES Act provided an option for financial relief by stipulating that single-family homes with a government-backed mortgage are automatically eligible for forbearance if they have been affected, directly or indirectly, by COVID-19. Homeowners who meet this criterion and request assistance are entitled to an initial forbearance period of up to 180 days (6 months) and a one-time extension of an additional 180 days, should they choose to take advantage of it.
According to the National Housing Law Project, roughly 70 percent of single-family homes are owned or backed by a federal agency, and roughly 30 percent (or 14.5 million) loans are privately owned and not backed by a federal agency.
A forbearance is a period of time during which homeowners do not need to make payments on their loan, and are not subject to foreclosure, eviction, or fees relating to those missed payments. Unless further agreements are reached with the lender (which they often are), at the end of a forbearance period, all the missed payments are immediately due.
Hertel’s employer, NCALL, is actually a nonprofit organization based in Delaware that offers pre-purchase counseling, financial education, and default and foreclosure prevention programs, and is working with homeowners to help them through the forbearance process. Since she works for NCALL, Hertel initially wasn’t comfortable asking for help around her mortgage from her employer. She and her husband were considering several organizations for forbearance assistance, but only heard back from NCALL. Hertel’s anxiety eased once she and her husband started working with a housing counselor in August.
Hertel says that when she logged onto her mortgage account and saw that their next payment wasn’t due until Jan.1, 2021, “it was like a huge weight lifted off my chest. I felt like I could breathe again.”
With their payment on hold, Hertel says, she and her husband have caught up on all of the other bills while also putting money into savings to prepare for the end of their forbearance early next year.
Though the CARES Act provision has acted as a safeguard to prevent homeowners from suffering complete devastation at the hands of the pandemic, it has not come without challenges. As with the nationwide eviction moratoriums, housing advocates and counselors say that the conditions of the provision are unclear to the average consumer, particularly relating to their rights and how to manage and exit their forbearance term. As a result, housing advocates and counselors are bracing for a foreclosure crisis in early 2021 once the provision expires on Dec. 31. It’s unclear, however, just how severe next year’s pending crisis might be.
A Skewed Picture
While there is no question that there will be a foreclosure crisis, housing experts say it won’t be anywhere near the levels of the Great Recession of 2007-2010, which resulted in an estimated 10 million homeowners losing their homes to foreclosure sales between 2006 and 2014. The forbearance provision and moratoriums in effect this year have no doubt delayed or tempered foreclosure proceedings. But that is not a permanent fix. ATTOM Data Solutions, a company that has compiled a national property database from county-level records, projects that anywhere from 225,000 to 500,000 homeowners could face possible foreclosure throughout 2021 because of delinquent loan payments.
Claudia Wilson Randall, executive director of the Community Development Network of Maryland, says that in her state, it’s unclear what the foreclosure situation will look like because the state suspended its Notice of Intent to Foreclose Electronic System. Under Maryland’s foreclosure process, a notice of intent had to be mailed to the borrower at least 45 days prior to filing an Order to Docket or Complaint to Foreclose. This was put in place during the foreclosure crisis, but was suspended in April due to the pandemic. It will restart in early 2021, but until then, “we don’t know how many foreclosures are in the pipeline,” Wilson Randall says.
The Mortgage Bankers Association (MBA) has been tracking the number of mortgage loans (including Fannie Mae, Freddie Mac, Ginnie Mae, portfolio loans and private-label securities) in forbearance since the beginning of April. The total number of loans in forbearance started from 0.25 percent in early March and reached a high of 8.55 percent around early June. At that time, MBA estimated that almost 4.3 million homeowners were in forbearance plans. As of Nov. 22, the total percentage of loans in forbearance had decreased to 5.54 percent, with an estimated 2.8 million homeowners in forbearance plans.
However, the number of loans in forbearance fluctuated throughout the month. In early November, Mike Fratantoni, MBA’s senior vice president and chief economist, said in a statement that there was a “significant increase in the rate of forbearance exits,” which accounts for the decrease in the total number of loans in forbearance for 11 weeks in a row. Later in the month, Fratantoni acknowledged that for two weeks “the share of loans in forbearance has increased, driven by a rise in new forbearance requests and another slowdown in the pace of forbearance exits.” This could suggest that homeowners are rushing to take advantage of the CARES Act provision before the end of the year.
Matthew Hulstein, a supervising attorney with Chicago Volunteer Legal Services, believes there is a skewed picture of the overall market and the number of homeowners in distress.
“One in five people are struggling to make their mortgage payment, but the number of people that are in forbearance is much less than that,” Hulstein says. “So if that’s 20 percent of people who are struggling to make their mortgage payments, but only 5 percent are in forbearance, it’s an underutilized option.”
When foreclosures are set in motion next year, there’s no doubt that they will hit vulnerable populations like the elderly and Black and Brown homeowners harder. The crisis will also have a real impact on small landlords, according to Ibijoke Akinbowale, director of the Housing Counseling Network at the National Community Reinvestment Coalition, who says that the pathway for recovery for small landlords and renters is not as clear.
“Right now, we’re in a rental crisis, and that rental crisis has a significant impact on homeownership,” explains Akinbowale. “You’ve got small landlords who represent a significant portion of the affordable housing stock that we have in this country, [and] they sit in the same boat as renters [in] not having national solutions that cover them.”
According to Hulstein, one of the issues is that the law does not require banks to advertise or to reach out and encourage people to sign up. “A lot of people don’t know about it until they start falling behind,” he says.
Hulstein is determined to get as many people as possible into a forbearance plan. Chicago Volunteer Legal Services is spreading the word to local leaders, housing counselors, and community groups to encourage people to put their mortgage in forbearance, even if they’re not behind on payments, but as long as they have been affected by COVID-19 and are having trouble making ends meet. For homeowners who do not have a federal-backed loan, Hulstein says there are no legally mandated options, but he still encourages people to speak to their lender. Many lenders are mimicking the federal programs, even though they are not legally required to offer them.
“If enough people sign up for this, we could bend the curve, in a sense, of foreclosures,” he says.
Communication Breakdown
For individuals who decide to enter a forbearance plan, the process starts off relatively easy. Servicers have created a streamlined process for entering forbearance agreements. Instead of homeowners having to write and send hardship letters or complete the standard application process, all they have to do is tell their servicer that they have a COVID-19-related financial hardship. Some servicers have set it up so that when a homeowner calls, they can go through an electronic prompt and press 1 or 2 to acknowledge this forbearance need. This is a notable difference from the difficulty homeowners had in getting assistance in the foreclosure crisis of 2008–2009.
“In March we were gearing up for the mad rush of people who needed help,” says Owen Jarvis of St. Ambrose Housing Aid Center in Baltimore. “But instead, the numbers dropped precipitously. I’ve never seen anything like this. I spent most of my career arguing and screaming at banks, and now people can just press 1 and get three months’ forbearance.”
In fact, it’s so easy it is concerning, says Akinbowale. She has heard accounts of homeowners who were only trying to get information about a forbearance and end up in one without giving their consent. Based on the CARES Act guidelines, homeowners who enter a forbearance should not see their credit scores affected. Yet Akinbowale has also heard accounts of homeowners seeing a negative impact on their credit even though servicers were instructed to suspend credit reporting when a homeowner’s financial hardship is related to COVID-19.
Although getting into a forbearance may be easy, that’s where the simplicity ends. The setup and exit are not as clear.
For instance, though the CARES Act stipulates that homeowners can pause their mortgage payments for up to two six-month periods, totaling a full year, some say that servicers are offering people three months instead. This is causing confusion around the next step to take once the three months expires and the homeowner is still experiencing a financial hardship.
“Are servicers extending that three months to the full six months for the initial term? Or are the banks considering people as rolling into their second term if they’re still experiencing COVID?” Hulstein asks. Homeowners “aren’t getting the full benefit of the law that way. I would prefer people to just take the full six months and then be ready to renew if necessary.”
Akinbowale also believes that the three-month installments are misleading and and keep consumers from fully understanding their protections under the CARES Act.
“I don’t think that the average consumer is knowledgeable enough about forbearance, what the agreement means, and their responsibility to engage with their servicers about the arrangements to come out of forbearance,” she says.
Sabrina Bryant, a housing counselor at NCALL who worked with the Hertels to guide them through their forbearance process, agrees, explaining that people aren’t aware that at the end of the three months, unless the homeowner asks for an extension or applies for a modification, servicers will either want to be repaid in full or will present a repayment plan.
“With the forbearances ending, the client is now facing a ‘pay in full to bring current’ [demand], which, for most, is not possible if they have been out of work or have had reduced hours due to COVID,” says Bryant. “From my understanding, if they call the mortgage company, there is a possibility of getting back on a forbearance [but] each lender is different.”
One of Bryant’s clients who was on a three-month forbearance was told that she had to pay the three months back payment immediately. Since the client had just returned to work, making that payment meant she had to forgo making her car payment, putting her car at risk for repossession.
A lack of communication from homeowners who don’t know they need to be proactive is also a problem.
“A lot of consumers have really dropped the ball with staying in contact with the servicer, which is a little concerning,” says Akinbowale.
Bryant says some lenders have told her that if they can’t get in contact with the customer, they will automatically give customers another three months of forbearance. If lenders can get in contact with homeowners, then they will ask first.
Automatic extensions are not always welcome. “A couple of my clients were like, ‘I went back to work, I really didn’t want it,’” recalls Bryant. “Then they had to call to be taken off forbearance and it still wasn’t decided if they would have to pay the balloon payment or is it going to be on the back end.”
Others, of course, have had their forbearances end when they would have wanted them extended.
End of Term
There is a downside to having the forbearance process streamlined upfront, Akinbowale says: it means that homeowners have not formed a relationship with a housing counselor who can guide them through the much more difficult part of exiting the forbearance agreements.
“When it’s time to come out of the forbearance, this is where your contact with the housing counselor is going to be critically important,” she says. “It is at the end of the forbearance term when a homeowner is in the greatest need for an advocate.”
There are several options that lenders can offer to homeowners to make up their missed payments, but to get the best one for their situation, homeowners or their advocates need to actively negotiate before the end of their forbearance period. One is a regular repayment plan where the homeowner can pay more than their regular mortgage payment for a few months until the missed payments have been made up. There’s a deferral or partial claim, which can either move missed payments to the end of the loan (this is technically a kind of modification) or put them into a junior lien to be repaid when the homeowner refinances, sells, or terminates the mortgage. Homeowners can ask for a modification whereby their payment can be reduced to an affordable amount and the missed payments will be added to the amount owed. Though the monthly payment will be lower, it will take longer to pay off the loan. A plan that at least moves the missed payments to the end of the loan is considered the best approach for housing stability and foreclosure prevention.
For homeowners who have a Fannie Mae–owned loan, their website offers a tool that allows them to verify what type of mortgage loan they have and what repayment options they are eligible for.
Homeowners with government-backed mortgages who received forbearance under the CARES Act are not required to repay the missed payments in a lump sum at the end of the forbearance. A lump sum, however, was the standard forbearance exit plan pre-COVID, so for those whose mortgages are not government-backed, or those who do not know their rights under the CARES Act and whose lenders don’t tell them, homeowners may end up being expected to repay their missed payments all at once instead of getting one of the other options. That will be devastating financially for individuals who have been subjected to an income interruption of any kind. They are unlikely to have accumulated extra savings after having needed to put off mortgage payments, and paying those missed payments off all at once will be a financial blow many cannot afford. “People may be at risk for foreclosure because of the way they’ve exited forbearance,” says Akinbowale.
Housing counselors would make this outcome far less likely. HUD research has shown that borrowers who received foreclosure mitigation counseling were almost three times more likely to receive a loan modification than similar borrowers who didn’t. They were also 70 percent less likely to re-default on a modified loan.
Unfortunately, not only have counselors been cut out of the front end of the process, their funding dropped when the post-foreclosure-crisis stimulus ran out. They will need increased funding to ramp up, find homeowners in forbearance, and guide them through the end of their forbearances. LISC, in its housing priorities document prepared for the Biden transition team, encourages support for bills in Congress that would direct additional funding to housing counseling agencies. The House and Senate bills would appropriate $700 million for the purpose, and send the funding through NeighborWorks for distribution. Funding for housing counseling is not currently referenced directly in the public Biden COVID or housing plan documents, though the COVID plan does call for legal aid for renters and aid for homeowners facing foreclosure.
Another possible concerning issue is homeowners being required to make balloon payments at the end of their 30-year mortgage period, or having their missed payments rolled into their current balance which, in turn, could increase their monthly payments, which the homeowner already had a hard time paying. This could cause a later uptick of foreclosures, especially if unexpected.
“I think we’re going to get an influx of calls of people who are facing foreclosure if the only option is to do a balloon payment,” Bryant says, adding that her clients are concerned about getting hit with balloon payments.
“I’m afraid that some people took [a forbearance] under the belief that it’s a payment suspension, and they can just start paying again after three months,” says Jarvis. “That’s not what it is. Can you imagine ‘Press 1 for a modification’? That would be great. But no. It was ‘Press 1 for forbearance.’ It’ll be ‘Send us paperwork for six months for a modification.’”
To address this issue, New Jersey housing advocates are rallying around a bill proposed by Assemblymember Britnee Timberlake, A4226, also known as the People’s Bill. Along with providing eviction prevention for renters, this bill would extend the right to get a forbearance on request to all homeowners, and would make a modification adding the missed payments to the end of the loan term the automatic outcome of those forbearances unless the borrower chose to pay them back earlier or in another fashion.
On Dec. 2, the Federal Housing Finance Agency announced that the foreclosure moratorium would extend from Dec. 31 to Jan. 31, 2021. However, the moratorium extension only apples to single-family homes with Fannie Mae– and Freddie Mac–backed mortgages. The one-month extension, while providing some relief for homeowners, is ultimately delaying the inevitable that will come early next year when the true consequences of the COVID-19 pandemic become clear. Advocates say the extension is not enough and are calling for more relief for homeowners and struggling renters.
Additional reporting by Miriam Axel-Lute.
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