Thanks to Darik Tolnay for this informative post.
What the Media Doesn’t Tell You About Mortgage Forbearance
Let’s do some ‘mortgage forbearance math’.
Mom and Dad have a mortgage.
It's currently $2,500 per month.
Dad gets laid off from work.
Dad hears all of the media reports that “Mortgage Lenders must grant you a forbearance if you have been adversely impacted by COVID-19 in any manner.”
Dad calls the Mortgage Servicer, and demands the forbearance he is “entitled” to.
In one phone call, he gets “6 months off" from paying his mortgage.
Seven months later, Dad is finally back to work, and hasn't been able to save any money during the forbearance period.
Forbearance is now lifted and Servicer says,
"You owe $15,000 + $2,500, which is NOW due". ($17,500 total due THIS MONTH)
$17,500 Due - NOW!
Dad almost passes out and says, “WHY??"
Servicer: "That's the 6 months of forbearance ($2,500 x 6) plus the current month of $2,500”
Dad: "I can’t do that, can we work something out?"
Servicer: "Sure, we will spread out the $15,000 over 12 months."
Dad: "Phew....ok, good. What will that look like?"
Servicer: That will be $3,750 a month for the next 12 months."
Dad: " OMG!!! WHY?
Servicer: “$15,000 divided by 12 months = $1,250. $1,250 (12 month payment plan) + $2,500 (typically due) = $3,750 (for 12 months)”
Dad: “I can't afford that."
Dad: "Can I refinance?"
Servicer: "No because the loan went into forbearance (& you have an 'unsatisfactory recent mortgage payment history' in the eyes of Fannie Mae & Freddie Mac’s current underwriting approval guidelines”)
Dad: "What can I do?"
In a nutshell, this is forbearance folks. Forbearance is not forgiveness.
We need to keep putting this message out there, because we are still getting a lot of questions (and I am seeing some highly irresponsible "advice" from the media and people on social media...many of them Real Estate Professionals who carry influence over those that read what they post).
Please understand the seriousness of this potentially catastrophic decision many of you (and those whom you care about) are considering.
The golden rule of economics is “there is no such thing as a free lunch”
The Mortgage Servicers cannot sustain this prolonged period of “fronting the money you don’t pay them during the forbearance period” and will need to seek restitution somehow.
Unlike the Mortgage Crisis in 2008, nearly everyone has equity in their homes nowadays. The logical solution will be for the Mortgage Servicers to pursue foreclosure on your home to recoup their money. While there is no guarantee what the Mortgage Servicers will do on a case-by-case basis, this possibility should be known up front.
Mortgage Interest Rates will likely be low for the majority of 2020…don’t allow media headlines to persuade you to take the wrong path and disqualify yourself from refinance eligibility…or worse…cause you to lose your home.
Hopefully we all learned from the last housing crisis how dangerous it is to take advice from people who are not qualified to provide it. None of these people will help you pay your mortgage once you discover you are in trouble.
While forbearance might be the only option for some, it should not be pursued unless absolutely necessary. Know the facts before you act
You (and those whom you care about) can always come to me for advice. I will objectively analyze each situation and advise you responsibly.
Wishing all of you (and those whom you care about) nothing but the best during these adverse times.
(special thanks to Jason for the idea behind this post)
**Although highly unlikely, other options may be offered by the Mortgage Servicer (such as deferring the entire amount due to the "back of the loan"), but assumptions should NOT be made without written clarification.