While it’s still possible to request forbearance via the CARES Act if you’re having trouble making mortgage payments, this option will eventually come to an end.
But it depends on the type of mortgage you have, e.g. an FHA loan or a conventional loan.
What’s the Last Day to Apply for Mortgage Forbearance?
- Fannie and Freddie loans – when the “national emergency” ends
- FHA loans – February 28th, 2021
- USDA loans – March 31st, 2021
- VA loans – February 28th, 2021
Oddly, it’s not even known when that date is, at least when it comes to mortgages backed by Fannie Mae and Freddie Mac.
That’s because the GSEs currently have the end date for relief set to the end of the national emergency. So it might be a moving target given COVID-19 seems to just be getting started.
Seeing that the other agencies have extended into the first three months of 2021, the hope is Fannie/Freddie will also do at least that.
The FHA had set a deadline of October 30th, 2020 (which was extended to December 31st , 2020 and now to Feb. 28th, 2021).
Similarly, the USDA had announced a deadline of December 31st, 2020 for approving forbearance requests, then aligned it with the FHA’s February 28th, 2021 cutoff date, and has since extended it until March 31st, 2021.
With regard to VA loans, it’s the same story as the FHA as government-backed home loans appear to have the same cutoff dates (other than USDA).
Whether these end dates all get extended in light of the continued uncertainty and ongoing economic disruption remains to be seen.
Loan Servicers Will Have Their Busiest Season Ever
I spoke to Sapan Bafna, senior leader, Advanced Delivery Engines for CoreLogic, who is responsible for developing IntelliMods, a web-based loan modification decisioning tool, to get his take on how things might go once the CARES Act forbearance option runs out.
In short, he believes loan servicers will experience “their busiest season ever” as they process post-forbearance requests for millions of homeowners.
He developed IntelliMods as a result of the 2008 economic crisis and believes the industry will be held accountable for underusing technology and available data.
In other words, they could make a complete mess out of things once borrowers exit their CARES Act forbearance plans.
And that won’t be good for the industry, which only recently got past the many loan modification and foreclosure snafus from the Great Recession.
Still, things don’t seem nearly as bad this time around, at least for most homeowners.
What Will Be the Most Common Outcome Post-Forbearance?
- Fannie and Freddie loans will likely go the payment deferral route
- FHA loans will use the COVID-19 Stand Alone Partial claim option
- USDA and VA loans will have full suite of existing home retention options on the table
When asked what would be the most common outcome after forbearance ends, Bafna broke it down by loan type.
He believes borrowers with Fannie- and Freddie-backed mortgages will take advantage of the payment deferral option, followed by a loan modification if they’re unable to resume making their regular mortgage payments.
For FHA loans, he expects most to go with the COVID-19 Stand Alone Partial claim option, followed by four new modification options that have been specifically created for the COVID-19 pandemic.
If all else fails, it is possible that some homeowners will have to go the deed-in-lieu of foreclosure route, or simply be foreclosed on.
The good news for the overall market is because of severe inventory shortages, additional foreclosed properties likely won’t put much if any downward pressure on home prices.
Of course, he did say “Some local markets have been hit particularly hard by the pandemic recession and will experience elevated unemployment and home-price weakness in 2021.”
At the same time, more resilient metros will rebound and actually see additional home price appreciation next year.
With regard to short sales, which were big after the most recent housing crisis, Bafna believes they’ll be “a small component since we currently see only around 3% of mortgages with negative equity.”
The House Rich, Cash Poor Conundrum
While it sounds like most homeowners will see relatively positive outcomes post-forbearance, he highlighted another issue regarding the many borrowers nationwide who are now house rich and cash poor.
Because property values have increased significantly over the past several years, but incomes have lagged, some homeowners may have difficulty refinancing their mortgages or otherwise accessing their home equity.
As such, a borrower experiencing financial distress because of the pandemic-related recession will be at the greatest risk of losing their home.
And while they might be able to sell via traditional channels due to their amassed equity, they’ll still incur moving costs, lose any homeowner-related tax benefits, and “forego the opportunity to build equity in their homes as prices rise in the future.”
This exemplifies the problem with real estate, which is an illiquid asset. Often there’s a lot of money trapped inside that can’t be easily accessed.
The good news, even if hard to access, is homeowners have lots of equity this time around, which is a big improvement from a decade ago when their mortgage balances grossly outweighed their property values.
That should allow the real estate market to absorb the negative impact of the COVID-19 pandemic, even if it goes on for another year or longer.