How mortgage forbearance impacts borrowers, servicers, investors
UPDATED 5:43 PM PT — Friday, May 15, 2020
As the number of mortgage loans in forbearance continues to rise, the question of who will be on the hook for those payments in the meantime is swirling. The number of Americans deferring their mortgage payments surged after Congress allowed those impacted by the coronavirus outbreak to do so for up to a year under the CARES Act.
Typically, when a mortgage is sent into forbearance, the servicer of that loan is required to advance payments on behalf of the borrower to investors. Since the end of March, the percent of mortgages in forbearance has surged from just under 3 percent to nearly 8 percent, leaving those servicers on the hook for billions of dollars in payments.
That jump in deferred payments pushed the Federal Housing Finance Agency (FHFA) to intervene in late April to help mortgage companies. The FHFA put a four-month cap on the length of time mortgage companies are required to advance payments for loans, backed by Fannie Mae and Freddie Mac. This left the government backed mortgage companies on the hook for the remainder of missed payments.
The agency also loosened restrictions on purchases of loans in forbearance, allowing them to be purchased by Fannie and Freddie.
To qualify to be purchased by the government backed companies, a loan in forbearance must close between February 1st and May 31st, must be a mortgage purchase transaction or no cashout refinance, and cannot be more than 30 days delinquent.
Sending a loan into forbearance will allow borrowers to skip payments without penalty and without impacting their credit scores. However, it isn’t just a free delay of payment.
Regular interest continues to accrue during that time, ultimately extending the amount of time it will take to pay off the loan.