Mortgage Forbearance in CARES Act

With national unemployment spiking this spring at 14.7 percent and climbing – and severe hardship in certain sectors like hospitality, tourism, oil and gas, and retail – the need for mortgage relief is also high, and climbing. 

Anticipating this trouble, the Coronavirus Aid, Relief and Economic Security (CARES) Act passed March 27th granted some relief for mortgage borrowers. 

Three unequivocal benefits for financially stressed mortgage borrowers granted by the CARES Act are:

  1. You likely qualify for automatic mortgage forbearance with your bank, simply by asking
  2. The forbearance agreement with your bank will not be reported to the credit bureaus, potentially protecting your credit score and credit report, and
  3. Residential foreclosure procedures are all temporarily frozen, at least until May 18th. Evictions are not enforceable until at least July 18th.

If you must suspend or lower your monthly mortgage payments because the COVID recession created a household financial emergency, then this relief is welcome. 

Nationwide mortgage relief like this is rare, because banks really, really, like to be paid on time, every month. 

The passage of time is strange right now in the COVID pandemic, right? What does “on time” even mean? For example, everyone acknowledges the month of April lasted, like, 5 years. 

My man Benjamin Franklin wrote in The Way To Wealth about how time passes, depending on whether you primarily lend money or borrow money. 

“Creditors have better memories than debtors; creditors are a superstitious sect, great observers of set days and times,”

Franklin wrote back in 1758. 

For debtors with a mortgage, however, time passes differently, says Franklin. 

“If you bear your debt in mind, the time which at first seemed so long, will, as it lessens, appear extremely short: Time will seem to have added wings to his heels as well as his shoulders. ‘Those have a short Lent, who owe money to be paid at Easter.’”

Anyway, as another mortgage payment day approaches on winged heels, forbearance options seem particularly important right now. If you have to ask for a break right now, you have to ask for a break.

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The CARES Act says that if you have a home mortgage with any kind of federal backing – whether from from the Federal Housing Authority, or Veteran’s Administration, US Department of Agriculture or the mortgage insurance giants Fannie Mae or Freddie Mac   – then you have the right to request forbearance on your mortgage. Very few people have a mortgage not administered in some way by these federal institutions, even if you didn’t know it already. Only a small percentage of private mortgages would not qualify for automatic forbearance under the CARES Act.

Out of curiosity, I looked up my own mortgage on the specially-created Fannie Mae and Freddie Mac websites for this purpose and found that indeed mine is covered by Freddie Mac, so I would qualify for forbearance if I chose to.

Incidentally, you may wonder why – if you only deal with your own bank and never with Fannie or Freddie – your mortgage shows up as qualifying on their websites? It’s very likely because your mortgage has been packaged up by Wall Street and sold into a mortgage bond that Fannie or Freddie guarantees.

Anyway, I found I have the right to request a fairly automatic forbearance on my mortgage, and so do you.

What would that look like? Forbearance comes in different flavors. Simply by stating financial hardship, and without having to present evidence, I could cease payments for a 180-day period. Then that could be extended by another 180 days at the end of the first period, at my request.

In addition, banks are forbidden from charging extra late fees or penalties, beyond the normal interest rate. Further, your bank is obligated by CARES – and subsequent guidance from the Consumer Financial Protection Bureau – to report a loan in forbearance as “current” to the credit bureaus, rather than delinquent for non-payment, as it normally would. So, even while not paying your mortgage for 6 months or a year, your credit would be fine.

Heck, this sounds so good, it’s a wonder anybody pays on their mortgage anymore! 

Not so fast. If you have some assets and income and were wondering about entering into a forbearance agreement in order to get strategic financial relief, the CARES Act is not a great deal, according to Wendy Kowalik of financial consultancy Predico Partners.

One version of forbearance you can get is a 3 or 6 month payment suspension, followed by a lump sum payment at the end of that time period to get back on track. That probably isn’t what most people expect. And it’s totally unaffordable to most. 

Wells Fargo, the largest mortgage lender by volume in 2019, offers a weblink to an extensive question and answer page on mortgage forbearance under the CARES Act. 

According to the Wells Fargo FAQ, maybe missed payments would be only due a long time from now, but it’s equally clear that that is only one possibility, among many.

Says Kowalik, “every conversation I’ve had – the assumption is that of course they are going to tack payments on to the end of the mortgage,” meaning 10 or 15 or 25 years from now, at the end of a mortgage term. “But if you have any liquidity, the likelihood is the bank will require you to pay the lump sum to get current on your mortgage right away.” That should worry most people considering a forbearance request.

Another version is a repayment plan that divides up the missed payments into a 3, 6, or 9 month repayment schedule. But that higher mortgage payment may then also become unaffordable. And prior to repayment, it will not be possible to draw further on lines of credit, or even to refinance the mortgage, without curing the forbearance.

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Wendy Kowalik of Predico Partners

A key point that Kowalik worries borrowers are not considering is that the banks themselves set the terms of repayment. If your bank decides your assets or income can handle it, they will demand faster repayment. Failure to comply then could affect your credit. None of the CARES Act protections extend past a year, which means that the normal enforcement mechanisms – credit reporting, foreclosure, and eviction – are all back on the table a year from now, if not sooner. 

Kowalik thinks borrowers who have a choice should be very wary of putting themselves into temporary relief that will cause even more hardship within a year. Understood that way, the CARES Act is quite bank friendly after all, in the sense that they can set the terms of repayment.

The key, says Kowalik, is this. 

“Don’t go into this lightly. It looks like assistance. It looks like a simple answer to help me with my current cash flow, but that may not be the case. There is a lot of devil in the details, and I would hate for people to get surprises.”

“And about the Wells Fargo website that says ‘We want you to know we are here to help,’ Kowalik said, “Well, that just about killed me.”

A version of this post ran in the San Antonio Express-News and Houston Chronicle.

Please see related posts:

An interview with Wendy Kowalik

Book Review: The Way of Wealth by Benjamin Franklin

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