The Housing Scene by Lew Sichelman

COVID Housing Update: Forbearance Options Going Forward

At last count, some 4.7 million homeowners were in some kind of forbearance plan. That represents almost 9% of all mortgages. Taken together, just over $1 trillion in principal has gone unpaid during the COVID-19 crisis, according to analytics firm Black Knight.

When these folks’ forbearance plans end, some will go back to making regular house payments and make up the balance at the end of their loans. Others will have to add something to their normal payments until they catch up. But some folks won’t be able to make payments of any kind.

No one knows exactly how many borrowers will find themselves in deep trouble when their government-mandated forbearance plans end Aug. 31. But it’s likely to be so many that their lenders will find it difficult be to keep up with requests for further relief. Ditto for landlords, who also seem likely to be overwhelmed with requests for respite.

The good news is that the vast majority of people in forbearance have strong equity positions in their homes. According to Black Knight, “only” 9% have a combined loan-to-value ratio of 90% of higher. Put another way, some 446,000 owners have less than a 10% equity position in their homes and could be in danger of foreclosure.

Most of the remaining owners have enough equity in their properties to weather the storm. But the bad news is that many lenders have tightened the rules on loans based on the stake people have in their homes. Even with high credit scores and good employment histories, people may find it difficult to access the money they have stored in their home if they no longer have a regular income.

The next best choice for financially strapped borrowers, then, is to approach their lenders about what so-called “workout plans” may be available. Despite what some believe, lenders aren’t in the business of owning houses. So they should be willing to extend an olive branch to borrowers who meet the rules.

The kind of workout plans available are very similar to the forbearance plans offered to borrowers during the first months of the pandemic. Here’s a quick rundown:

-- Refinancing. A new loan with new terms, interest rates and monthly payments that are more affordable.

-- Repayment. Allows you pay the past due amount, along with your current payments, over a specified period to bring your mortgage current. The repayment period could be months or years, depending on your situation.

-- Forbearance. Your lender will suspend or reduce your monthly payments for a specific time, after which you must start paying. You also will be required to make up the payments you missed as you go along.

-- Modification. The lender will agree to change the terms of your mortgage -- the amount you owe, the length of the loan, the interest rate -- to make your payment more affordable.

While each of these options has drawbacks, they are all designed to help you stay in your home while recovering from your financial setback at the hands of COVID-19. Your only other choices are to sell and move, or to slide into foreclosure.

If you choose to sell, inventory is so tight right now that you should be able to sell quickly and at a good price. If you opt for foreclosure, the process isn’t likely to start until you’re four months in arrears, so at least you’ll have extra time to figure out where you are going.

Applying for extended relief won’t be nearly as easy as it was to obtain forbearance. Under the government’s forbearance rules, all you had to do was apply. This time around, though, the paperwork needed could be overwhelming.

Late last month, the Consumer Financial Protection Bureau gave lenders permission to offer certain loss mitigation options even if the borrower turns in an incomplete application for assistance. But even with that, it’s always a good idea to align yourself with a housing counselor who knows the ins and outs of the process. You can find government-certified counselors on the Department of Housing and Urban Development website (hud.gov).

But start the process early. Servicers of federally backed mortgages are required to contact borrowers at least 30 days before their original forbearance period ends to determine an appropriate next step. But lenders and loan servicers of all kinds are likely to be inundated with requests, so don’t wait. Be proactive.

“Communication is key to a successful outcome,” Bob Driscoll of Rockland Trust, a community bank in Massachusetts, advised. “Asking for help isn’t always easy, especially if you’ve already been in a forbearance plan. But in my experience, if you are honest and can state what you want, you should be successful. We know you need help.”

Take notes about every conversation you have, and make and save copies of every form and document you are asked to submit. And if you don’t hear back within a reasonable amount of time, get back on the horn. You must be your own best advocate.

Remember, though, more relief is not automatic. The decision “will depend on the homeowner’s financial situation when the forbearance plan has concluded, and whether they can afford to make extra payments over time, they can make only their existing monthly payment or they’d had a permanent impact to their ability to pay their existing monthly payment,” Malloy Evans, vice president and chief credit officer at Fannie Mae, told me in an email.

Now, a quick word about help for renters. According to LawAtlas.org, a million tenants are evicted from their homes annually, and that number is likely to be compounded when temporary eviction moratoria end.

Twelve states are set to lift their protections by Aug. 31. And in some cities within those states, landlords need only 24 hours after receiving an eviction judgment to retake possession. “Eviction is a looming crisis as we begin to lift out of the pandemic,” says Megan Hatch, a research fellow at the Center for Public Health Law Research and an associate professor at Cleveland State University.

A tenant’s best defense is to know the landlord-tenant laws where they reside. There isn’t a central clearinghouse that I know of for these laws everywhere, but LawAtlas has a data set of state-, county- and city-level laws and court rules in effect as of Aug. 31, 2019, in 10 of the largest cities in each of the four census regions.

“The data set is the only comprehensive resource on eviction law at the city level that provides not only the proper citations but also the full text of the law in each city,” according to CPHLR’s Joshua Waimberg.

Also take a look at KnowYourOptions.com, a site set up by Fannie Mae as a resource for renters and owners.