Mortgage relief included in the federal stimulus package last month may not be enough to save homeowners facing balloon payments when the forbearance period ends.
The CARES Act allows borrowers whose loans are backed by the federal government to get 180 days of forbearance on mortgage payments, with a possible extension of another six months, due to job loss or other financial hardship caused by the coronavirus outbreak.
The catch is that mortgage borrowers may owe all or a big chunk of the skipped payments when the forbearance period ends. Exactly how much will come due is unclear, housing activists say, because federal agencies are offering little guidance.
The result could be a delayed wave of foreclosures, said Jacob Inwald, the director of foreclosure prevention at Legal Services NYC.
“What forbearances do is manufacture eventual foreclosures,” he said.
Help On Hold
A total of 3.74% of mortgages nationwide were in forbearance as of April 5, a jump from 2.73% the previous week, according to the Mortgage Bankers Association. The industry group reported only 0.2% of mortgages in forbearance on March 2, before the coronavirus and mandatory business closures walloped the economy.
Even getting a hold of someone at a mortgage servicer is proving challenging. While the MBA says wait times on mortgage servicer help lines was down to 10.3 minutes per call on average, housing counselors say that’s not what their clients are experiencing.
“I haven’t been able to complete a call in less than an hour,” said Allyson Snow, a senior attorney at the Legal Aid Society of San Diego, who is often making calls for elderly clients falling behind on their mortgages.
Yoselin Genao Estrella, the executive director of Neighborhood Housing Services of Queens CDC, Inc., said even if they get through, her clients in some of the Queens neighborhoods hardest hit by Covid-19, are getting shunted to website portals and then wind up diverted back to the phone.
In the Soup
The CARES Act does not provide guidelines for how servicers should treat the delayed payments when the forbearance periods end. Instead, each of the government agencies that back mortgages—including Fannie Mae, Freddie Mac, the Federal Housing Administration and Ginnie Mae—are setting their own standards.
When a borrower speaks to a mortgage servicer, the options available may depend on the agency and the investor, and lead to surprises, said Chris Odinet, a professor at the University of Oklahoma College of Law and an expert on mortgage servicing.
“Americans should not have to learn the alphabet soup of federal agencies and programs that are involved in the American mortgage market to get help right now. But that’s exactly what’s happening,” he said.
Even for servicers it can be difficult to know what to offer. Snow said her clients will get different information about what help is available, depending on which representative they speak to at the same servicer.
States have issued their own orders and statements about how mortgage payments and foreclosures should be treated during the pandemic, which has further clouded borrowers’ expectations of the help available to them, Inwald said.
“All of these pronouncements have created the misperception that people can stop paying their mortgages. That there’s some sort of moratorium,” he said.
Once borrowers do get through to their servicers, the biggest question is how they will make up the missed payments.
Right now, many servicers are asking for balloon payments at the end of the forbearance periods covering all of the missed payments, said Bethany Sanchez, a senior administrator for fair lending at the Metropolitan Milwaukee Fair Housing Council.
Most borrowers in distress will not be able to handle those payments, potentially leading to a delayed wave of foreclosures, Sanchez said.
“At the end of the forbearance period there is going to be a reckoning,” she said.
Some servicers are allowing borrowers to simply extend the term of the mortgage, many of them 30-year loans, so borrowers can make up missed payments on the back end. While still others are providing different loss mitigation tools, such as reducing the principal amount owed or other ways of lowering payments.
The problem, according to Inwald, is there isn’t enough guidance about what servicers should do. The industry agrees.
“Right now we’re still waiting on guidance to determine what that will be here in this crisis, so it leaves the clients a bit uncertain,” Jay Farner, the CEO of Quicken Loans, one of the country’s largest mortgage servicers, told CNBC on April 15.
Many consumer advocates want the Treasury Department or Congress to ban balloon payments and mandate that servicers allow mortgage payments be tacked on at the end of loan terms.
“There should be a significant incentive for lenders to modify the loans with terms that allow stability for the homeowners, the lender and the community,” Sanchez said.
But even with strict guidance, more help is likely to be needed, said Joseph Sant, the deputy general counsel at the Center for NYC Neighborhoods.
“We have time right now, between now and when this forebearance ends, to put in the operational structure to deliver widespread mortgage relief,” he said.
The CARES Act also only covered federally backed mortgages, leaving around 36% of the U.S. mortgage market backed by private investors without any guaranteed forbearance, Sanchez said.
Hanging in the background of the forbearance concerns are questions about whether nonbank servicers, which collect most U.S. mortgage payments, can weather the storm. The servicers are compensated by retaining a small percentage of payments they handle and don’t have the same capital cushions required of banks.
The industry, and congressional Democrats, have been asking for a Federal Reserve liquidity fund that would bail out servicers at risk of failing as borrowers miss loan payments. Treasury Secretary Steven Mnuchin has said he is receptive to such ideas, although FHFA Director Mark Calabria has said he opposes such a move. The FHFA oversees Fannie Mae and Freddie Mac.
Without the government assistance, servicers may have to ask for balloon payments, Odinet said.
“We’re going to see just how the big macro-economic concerns about liquidity have very real on the ground consequences for consumer protection,” he said.