Consumers Struggle To Navigate Muddled Mortgage Forbearance Programs

As the economic collateral damage induced by the COVID-19 epidemic has spread far and wide throughout the nation, leaving nearly 20 million Americans newly unemployed, economic anxiety has become endemic. PYMNTS’ Navigating the COVID-19 Pandemic: How the Paycheck-to-Paycheck Economy Is Beginning to Buckle reveals that the consumers who have already been hit hard by the epidemic, economically speaking, are bracing for an even harder future.

Of the U.S. workers we spoke to, 48.8 percent were somewhat worried they might lose their jobs, with 28.5 percent reported being “very” or “extremely” concerned. More than half – nearly six in 10, to be exact – reported living paycheck to paycheck, and nearly half (45.5 percent) said they have $2,500 or less in savings to help them get through what is forecast to be a very long lean period.

To stem the wave of economic devastations wrought by the full economic shutdown, the federal government has in the last several months passed over $2 trillion in stimulus funds to be injected into the economy in various ways. Among the better-known efforts that came as part of the CARES Act are the beefed-up unemployment benefits now available to a wider swath of jobless workers, the $350 billion Paycheck Protection Program and the roughly $1,200 in stimulus funds being paid directly to most citizens.

Somewhat less attention-getting has been a provision of the CARES Act that seeks to offer relief for American homeowners who suddenly find themselves unable to make mortgage payments. In it broad stroke, the law requires lenders to offer hard-hit consumers a minimum of 180 days and a maximum of 360 days to pause their mortgage payments without any detrimental effect on their FICO score.

But digging down into the details of the program, it quickly becomes apparent that the bill’s protections are limited to a smaller subset of U.S. mortgage holders who qualify for the loans. And even among that smaller subset, depending on the specific details their note holder has filled into the less-defined elements of the program, it might not be the wisest deal to take.

Who Qualifies for Mortgage Forbearance?

The provision of the CARES Act does not extend a right to forbearance to every consumer with a mortgage – the mortgage must be federally backed. That, according to the government’s data, covers roughly 62 percent of U.S. mortgages.

And, unlike other programs into which consumers enroll automatically, mortgage holders must apply for the program and demonstrate that they are experiencing financial hardship caused directly by COVID-19. However, once a customer has demonstrated that their loan qualifies, the CARES Act requires that underwriters must extend forbearance for a maximum of 180 days, with the possibility of applying for an additional 180-day extension at the end of that initial period.

But while the law requires that consumers are allowed into the forbearance period, it does not clearly specify what the bank is required to do at the end of the period. And as various mortgage lenders are interpreting the program differently, many different end periods are legally permissible.

The most favored version of the end of forbearance sees the months of missed payments tacked onto the end of the loan, without otherwise changing the payment or loan structure. Considered the easiest and lowest-impact option, that is the gold-medal standard among consumer protection advocates.

The silver standard is represented by lenders who, instead of offering a full stop on mortgage payments, are offering a reduced payment amount for a set time period, with the difference between what was paid and what was owed each month tacked onto the 12 months of payments following the forbearance. So, for example, a customer whose mortgage payment fell from $1,200 a month to $600 a month during the year-long forbearance term would pay $1,800 a month during the following years.

That is not a beloved variation of paying off the forbearance period, but it is still greatly favored over the bronze option, which involves a payment-free period followed by a massive balloon payment at the end of forbearance to rapidly bring the account current. This is the option that Hawaii’s Julia and Jim Hansen were offered when they reached out to their lender looking for forbearance when both of their tourism-centric jobs were shut down. They were told they could defer their payments for three months, but they would have to come up with four months of mortgage payments at the end of the three-month period. Failing to do so would end in foreclosure.

“I feel the government is trying to help us, and I feel like [our mortgage lender] is trying to rip us off,” Julie Hansen told NPR. “I’m very disappointed and angry at them.”

And according to Mike Calhoun, president of the Center for Responsible Lending, the Hansens are far from alone in their anger and frustration, as people coming out of a financial hardship are unlikely to have a large sum of money to catch up on many months of mortgage payments all at once. To make the system work as the government intended, he noted, it is not enough to simply hit the pause button on payments for a short time. Borrowers also need time to get back on track without getting dinged by a big balloon payment.

“It is clear that the borrowers should get relief,” Calhoun told NPR. “And at the end of the period of forbearance, they are not required to pay in a lump sum, unless for some reason they are able to do so at that time, which will likely be very rare for borrowers, given this kind of crisis.”

But, as Forbes and NPR have both reported, the mortgage relief world bears further watching, as some underwriters have changed their repayment policies in response to the wave of demand, and consumers are concerned about the feasibility of any payment scheme that isn’t adding the missed payments to the end of the loan. And while underwriters want to get paid, when faced with the choice between offering longer forbearance and having to manage a lot of foreclosures in the short term, they are getting more comfortable with forbearing.