Approximately 1.7 million homeowners still remain in some type of mortgage forbearance plan

Fantastic article from Forbes writer Natalie Campisi



Timely article as many lenders have already removed any forbearance assistance and due to delinquency of the mortgage account have already filed notice of default and notice of sale on home.

Here’s What Will Happen When The Mortgage Forbearance Lifts

About 1.6 million homeowners who sought Covid-19 relief through the government’s mortgage forbearance program will soon exit, with 850,000 exiting in the first wave now through October. That means many homeowners will have to decide whether they want to keep making mortgage payments, modify their loan or cash out in a hot housing market by selling their home.

This could also provide a small boost to housing inventory for home shoppers who’ve struggled to buy a house due to competitive pricing and low inventory.

We spoke to several experts about the options available to homeowners in forbearance, and how the mass exists might impact the housing supply.

Homeowners In Forbearance Topple 1 Million

There are an estimated 1.6 million homeowners currently in various phases of forbearance, and that number continues to fall as more people exit forbearance.

After the initial set of forbearances expired on July 31, the number of loans in forbearance fell to 3.26% for the week ending on August 8 compared to 3.40% in the prior week, according to data from the Mortgage Bankers Association (MBA).

“The largest decrease in a month in the share of loans in forbearance came from a jump in forbearance exits, as many homeowners are nearing the end of their forbearance terms. The forbearance share declined for all investor and servicer categories,” said Mike Fratantoni, senior vice president and chief economist at MBA, in a press release.

Being in forbearance means that you can’t currently afford your mortgage payment, which is never a good position to be in. However, there are several options for folks exiting forbearance, and it’s important to consider each one.

New Rule Helps Struggling Borrowers Avoid Foreclosure

Preventing foreclosure is the most important goal when exiting forbearance. Whether you choose to modify your loan, go with a payment option for the months you missed or sell your home, all of these are better options than losing your home in foreclosure.

Foreclosure is emotionally and financially damaging. According to Experian, homeowners can see as much as a 100-point reduction or more to their credit score after foreclosure. This kind of blow can affect your ability to rent, buy, apply for new credit and even get a job.

To help homeowners avoid foreclosure, the Consumer Financial Protection Bureau issued a rule in place that will require lenders to follow three steps before starting a foreclosure, which include:

1. The loan servicer must review a loss mitigation application submitted by the borrower that shows the borrower’s financial and household information, which can help the lender determine next steps.

2. Loan servicers must follow state and local laws to verify that the home has been abandoned before proceeding with a foreclosure.

3. Loan servicers must make a diligent effort to contact the homeowner before going forward with the foreclosure. Foreclosure is allowable in the event homeowners are a minimum of four months behind on their mortgage, and have been unreachable for more than 90 days.

The CFPB’s new rule goes into effect from August 31 through January 1, 2022. As long as the loan servicer adheres to these rules, they can file a foreclosure if necessary.

Payment Options After Forbearance Ends

Once your forbearance ends, you’ll have to make arrangements to repay what you owe (all of the missed payments during forbearance). The options for repayment vary by the loan type, as shown below. Although you can pay what you owe in one lump sum, none of the loans require a lump sum payment once forbearance ends.

Fannie Mae and Freddie Mac Loans

  • Repayment plan. This allows you to repay your missed payments over time through higher monthly mortgage payments.

  • Payment deferral. Resume your regular monthly mortgage payments and put the missed payments either at the end of the loan, or when you refinance or sell your home.

  • Loan modification. If your income has a long-term or permanent reduction, you may be eligible for a modification that changes the length, interest rate, principal amount or a combination of all to make the mortgage payments affordable.

FHA/HUD Loans

  • Covid-19 recovery standalone partial claim. If you can begin making your regular mortgage payments after forbearance ends, this option allows you to put the money you owe into a subordinate, no-interest lien that comes payable if you refinance your mortgage or sell your home.

  • Covid-19 recovery modification. For homeowners who can’t afford the regular monthly payments after forbearance, they can extend their mortgage term to 360 months, which will reduce the monthly principal and interest payments.

  • Loan modification. Borrowers can negotiate up to 25% off their mortgage payments.

USDA Loans

  • Payment plan or extension. Borrowers who can resume regular mortgage payments can get an affordable payment plan or can get the missed payments deferred to the end of the loan, which would extend the term of your mortgage.

  • Loan modification. Borrowers can negotiate up to 25% off their mortgage payments.

VA Loans

  • Deferment. After forbearance, borrowers can defer what they owe to the end of the loan without owing additional interest. To reduce the lump-sum payment at the end, borrowers can pay off the amount over time. Another option is to get a personal loan to cover the amount due.

  • Modification. For borrowers who can’t afford their regular mortgage payments, the lender may explore loan modification options to make the loan more affordable.

  • Loan modification. Borrowers can negotiate up to 25% off their mortgage payments.

Should I Sell My House Instead?

There are several reasons why homeowners might want to sell when they exit forbearance. If their income takes a permanent hit and it’s difficult making monthly mortgage payments, selling the home could be a good way to reduce costs.

Additionally, if your home is in a high-tax area or you pay hefty homeowners association fees, moving to a more affordable neighborhood is another way of saving money.

And this is an ideal time to be a seller.

Home equity is soaring, which is particularly helpful for homeowners in forbearance considering selling at a higher price than purchased. According to CoreLogic, the median home equity is around $100,000 and the median loan-to-value (LTV) ratio is at about 61%. In other words, most people won’t have trouble turning a profit if they choose to sell their homes.

Big equity gains were fueled by intense buyer demand this past year, which has driven up home prices across the country. Even people in forbearance who haven’t paid their monthly mortgage bill still have significant equity in their homes.

Borrowers with Federal Housing Administration (FHA) loans have about $68,000 in equity while borrowers with loans backed by Fannie Mae or Freddie Mac have approximately $125,000 in equity.

“The wealth accumulated in homes also offered a safety cushion for homeowners who may have gone through forbearance and still needed financial assistance upon exit, by allowing them to sell the home, repay the loan, and avoid foreclosure and a scar on their credit report,” says George Ratiu, senior economist at Realtor.com.

Although people who can no longer afford their homes are in a great position to sell, many will still have to jump back into the housing market, and it’s a tough time for both renters and buyers. If you decide to sell and rent, make sure you know how much rental prices are in your area, as it can be just as much or even more expensive than owning.

Rental Prices Are Soaring

Rental prices in June for single-family homes rose to their highest levels since 2005, with a 7.5% year-over-year (YOY) spike.

Rental homes that cost more than 125% of the regional median jumped 9.6% in June compared to the same time last year. In contrast, homes that were 75% or less than the regional median saw a relatively smaller increase in rent, up 5.3% during the same period.

“Current borrowers electing to sell due to forbearance are selling into a seller’s market. That comes with the tradeoff that buying into the market will be expensive,” says Glenn Brunker, president at Ally Home. “Rental demand has been robust, increasing at a similar rate to the purchase market, so those looking to move into the rental market should expect increased prices.”

Also, as more people go back to work, rental prices are expected to increase, says Selma Hepp, deputy chief economist at CoreLogic.

“As employment rates continue to rebound and people return to urban centers, rent of multi-family homes will pick up the pace as well,” Hepp says.

How Forbearance Exits Might Impact Housing Supply

With inventory at record lows and construction falling 7% in July, many folks are hopeful the slew of forbearance exits will boost housing supply, if those homeowners choose to sell.

Zillow recently estimated that because of forbearance moratoriums expiring, inventory will get a 15% boost from the June levels, which is about 211,700 more homes and 13.1% of all predicted sales during the next three months.

Zillow’s estimate is based on historical trends that showed “roughly 25% of borrowers who exited forbearance in the past year have listed their homes for sale afterward,” says Chris Glynn, senior managing economist at Zillow.

However, there’s also the chance those home sellers will turn around and buy another house, so home availability may not increase as much as expected, Glynn adds.

And with government agencies allowing loan servicers to modify more loans, the likelihood of a big influx of homes for sale is slim.

“As a result of all of these efforts, there is likely to be a minimal addition to the housing stock,” Hepp says.

But even if more inventory enters the market, it won’t be enough to put a significant dent in high-priced homes, says Lawrence Yun, chief economist at the National Association of Realtors (NAR). Basically, prices might slow down a bit with new homes entering the market, but they won’t roll back.

“With more inventory, there will be less prevalence of multiple bidding,” Yun says. “[But] I don’t see a price decline. Rather a moderating growth to home prices.”

How to Decide Whether to Sell

For those in about to exit forbearance who want to sell, there are two major (and opposing) forces you should consider: large gains in equity and a very expensive housing market. It’s expensive for both owning and renting right now.

This means a seller could make a lot of money on the sale, but they might face a hefty-priced housing market depending on where they chose to live next. Do your research and budget yourself ahead of time, like knowing all the closing costs to selling a home, to determine whether a sale is worth it in the end.

Forbes writer Natalie Campisi

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