Mortgage Forbearance

In recent posts, we have already discussed the ballooning treasury and inflation numbers in the US economy.  In this post, we will take a look at another aspect of the American economy, the mortgage industry.  Many details come from this article.  Obviously, we have been discussing the veracity of American journalism recently, so we do still have to take the data in this article with a grain of salt as it relates to mortgage forbearance and it’s potential future impact.

The first wave of borrowers to enter the government’s coronavirus mortgage bailout program are entering their last possible quarter for relief, which means that come September they will either have to start paying, sell their homes or go into foreclosure.

Mortgage bailout programs, both government and private sector, launched at the start of the Covid pandemic. The government originally allowed borrowers to delay their monthly payments for up to a year. That was then extended to 18 months. Each quarter, borrowers must re-up.

An estimated 7.25 million borrowers have participated in forbearance programs at one point or another throughout the pandemic, representing 14% of all homeowners with mortgages, according to Black Knight. About 72% of all participants have since left their plans, while 28%, or just more than 2 million, remain in active forbearance.

This week and next, a total of more than 350,000 borrowers will be reviewed for extension or removal from forbearance, according to Black Knight. Of the 146,000 plans reviewed this week, 44,000 homeowners left forbearance, while the plans of 102,000 were extended. With roughly two-thirds of borrowers remaining in forbearance, Black Knight estimates that 575,000 plans will expire in September and the beginning of October, meaning mortgage servicers will be facing the daunting task of dealing with about 15,000 troubled loans per day.

Fannie Mae, Freddie Mac and the FHA this week published new guidelines to help borrowers whose plans are expiring. Part of that includes more interest rate reduction in loan modifications to help keep borrowers in their homes.

“Allowing more families to qualify for an interest rate reduction will prevent unnecessary foreclosures, help strengthen the Enterprises’ books of business, and make sustainable homeownership a reality for more families currently living with the uncertainty of forbearance,” said acting FHFA Director Sandra Thompson.

Mortgage servicers in general want to keep as many borrowers in their homes as possible, since the foreclosure process is very expensive. They can perform loan modifications, lowering the interest rate, and can also tack on all the missed payments to the end of the loan. While there is a so-called waterfall of options, the final one is selling the home, which in today’s very pricey housing market, could even net some borrowers a small profit.

While an improving economy should help more borrowers to become current again on their payments, no one denies there will be foreclosures in the fall and winter, as some troubled borrowers simply have no other recourse. While it is difficult to predict how many, it will be nothing like the crisis a decade ago when more than 11 million homes entered the foreclosure process.

For me personally, I believe the Covid mortgage forbearance will have a larger impact than this article seems to anticipate.  In 2008, we saw what happened when lenders and financial firms did risky things, as it related to mortgages (aka The Big Short).  In reality, I think we have a very similar situation to 2008 except that financial firms also expanded their activities to other assets, such as US treasuries.

Overall, we all need to evaluate the possible outcomes and come up with plans to help us ride out potential troubles ahead.  Start your plan NOW! Click here.

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