Broad Mortgage Forbearance Could Help Economy Through Coronavirus Outbreak
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As the number of coronavirus cases in the U.S. continues to surge, more Americans could be without paychecks as businesses are forced to cut hours or close. Though workers may be able to offset lost wages through employer- or government-provided programs, many will still struggle to keep up with bills — like their monthly mortgage payment — while they wait to return to work.
To address the economic fallout, Congress is looking at various measures. One such measure could be a broad mortgage forbearance for all borrowers with federally backed loans, which U.S. Senate Minority Leader Chuck Schumer, D-N.Y., has included in his list of proposed actions. In this economically critical time, broad mortgage forbearance, which means temporarily suspending or reducing your payments, could make a significant impact with minimal cost.
How a broad forbearance could work
For many Americans, housing costs are their largest expense. In the U.S, 62% of homeowners have a mortgage. Meanwhile, the median mortgage payment across the U.S. is about $1,100, or less than 15% of a homeowner’s median monthly income (about $7,530). Borrowers spend almost $700 billion annually — or about $58 billion a month — on mortgage payments. Relieving Americans of mortgage payments for the duration of the pandemic could help mitigate the negative effects of the COVID-19 outbreak on the economy.
Individual borrowers can request a mortgage forbearance. They ask their lender to suspend or reduce their mortgage payments for a certain period, which can be for a few months or a year as determined by that lender. However, the process can be cumbersome, requiring a large amount of paperwork with slow approval. With a mortgage refinance boom underway and disruptions to workflow at most lenders, there isn’t capacity to process a large number of forbearance requests.
The vast majority of mortgages in the U.S. are guaranteed by Freddie Mac, Fannie Mae and Ginnie Mae, which puts the federal government in a position to intervene. In establishing a broad forbearance program, the government-sponsored enterprises (GSEs) could continue to make payments to investors so the capital markets aren’t disrupted.
A line of credit from the Treasury to the GSEs included in Congress’s legislation could facilitate this. The amount advanced by the Treasury could subsequently be repaid when borrowers catch up on their deferred mortgage payments. Servicers could also be advanced the monthly servicing fee to be repaid later.
Though interest would continue to accrue during the forbearance, it could address cash flow constraints borrowers may encounter. Further, any borrower could continue to make payments if they wanted, just as they can prepay their mortgage at any point.
6 facts about mortgage forbearance — and what could change
These quick facts about mortgage forbearance offer insight into what kind of consumers this works for, as well as potential benefits and drawbacks. We’ll note how each of these factors could be improved by a broad forbearance program.
The terms of and process for applying for a mortgage forbearance vary by lender. When borrowers need a mortgage forbearance, they can reach out to their lender to discuss possible terms. The process can be time-consuming and complex, requiring supporting documents and processing by the lender.
- How it could work: A broad forbearance for all GSE-guaranteed mortgages could be implemented quickly for maximum impact.
Payments put off while a mortgage is in forbearance need to be made once the period ends. Some lenders expect a lump-sum payment, while others offer repayment plans.
- How it could work: A broad forbearance could allow missed payments to be spread out. Subsequent repayments could be used to repay the Treasury for funds advanced during the crisis, making it a low-cost program for the government.
Mortgage forbearance isn’t recommended for those who habitually struggle to make their mortgage payments. Instead, it’s best for those undergoing a temporary hardship. Mortgage delinquency rates were only 2.35% as of the fourth quarter of 2019, meaning a majority of Americans were able to keep up with their mortgage payments before the coronavirus hit.
- How it could work: The low delinquency rates infer that Americans would be good candidates for broad forbearance.
Depending on the lender, credit may be adversely impacted by a mortgage forbearance. Some lenders may report payments that weren’t made during a forbearance period as late, which could hurt — or even wreck — a borrower’s credit.
- How it could work: With a broad national forbearance, credit bureaus could adjust their reporting for all mortgage borrowers to make sure there aren’t negative credit score impacts.
Since 62% of Americans who own homes have mortgages, payments for borrowers without a regular paycheck can add up. Mortgage forbearance typically provides homeowners a buffer.
- How it could work: A broad mortgage forbearance could allow homeowners to redirect the funds normally reserved for their mortgage payment toward other necessities until they can return to work.
If you’re not in a situation where a mortgage forbearance is an option, refinancing can be a good way to reduce mortgage payments during times of hardship. Refinance capacity, though, is currently very constrained.
- How it could work: A broad forbearance could ease the pressure to refinance and allow borrowers more time to get extended relief by refinancing. By taking advantage of lower rates, homeowners can potentially reduce their monthly mortgage payments by hundreds of dollars every month once the crisis passes.
LendingTree research analyst Jacob Channel contributed to this report.