Last week, the United States reported the lowest number of new COVID-19 cases in a year, and there’s more good news for homeowners as the number of forbearance cases also decreased. The pause on mortgage payments provided temporary relief for millions of borrowers, but there’s still some confusion about what forbearance is.
Let’s examine how many borrowers are in forbearance, review some key elements of the program, and how forbearance may affect selling a home.
How many homeowners are in forbearance?
According to the Mortgage Bankers Association’s latest numbers, more homeowners are exiting forbearance programs. There was a 14-basis-point drop in the forbearance share. That’s the eleventh consecutive week of declines since the program began over a year ago. Last May, there were 4 million homeowners taking advantage of the program to delay their monthly mortgage payments. Today, the number is almost halved to 2.1 million, representing 4.22% of all loans.
Even better news is the rate of new requests for forbearance has dropped to 4 basis points, which is the lowest level since March of 2020.
However, those who are at the highest risk of losing their homes remain in forbearance. More than half of those in forbearance extensions have been in the program for more than 12 months. Those who remain are more likely to live in an area with lower incomes and lower credit scores than those who have already exited. Fortunately, there is hope for a continued reprieve until 2022.
Mike Fratantoni, MBA’s Senior Vice President and Chief Economist, reflects on the progress of forbearance, noting, “The opening of the economy, as the successful vaccination effort continues, should lead to further reductions in the forbearance share. However, many homeowners continue to struggle. Borrowers who are reaching the end of their forbearance term should reach out to their servicer to review their options.”
What homeowners need to know about forbearance
Forbearance is a mortgage relief program for homeowners struggling with financial hardship. It’s a pause or reduction on your mortgage payments. Forbearance isn’t new, but since the COVID-19 pandemic, it’s become more well known. Like Kay in the video below, homeowners took advantage of forbearance during the economic downturn after the housing market crisis.
The CARES Act was passed to keep businesses and homeowners afloat as the coronavirus ravaged many industries and threatened livelihoods. A part of the act included making forbearance easier to get, but there are some important elements to understand:
- Not automatically enrolled. Borrowers must reach out to the lender or mortgage servicer to discuss options and enroll in a program.
- Not all loans are eligible. The CARES Act specifically covers loans that the federal government backs. FHA, VA, USDA, Freddie Mac, and Fannie Mae loans qualify. Even if you have a loan from a private lender, you should reach out to see what your options are. They may be willing to work with you, but the terms of the forbearance agreement may be different.
- Missed payments still need to be repaid. When discussing forbearance options, ask how and when you’ll be expected to pay.
- No proof of financial hardship is needed. Under the CARES Act, borrowers simply need to let servicers know they are experiencing financial hardship due to the pandemic.
- June 30, 2021 Extension. The Biden Administration has extended the enrollment deadline to apply for forbearance under the CARES Act. An additional six months of forbearance in three-month increments are also available to those who entered forbearance on or before June 30, 2020.
Proposed changes to mortgage servicing
The Consumer Financial Protection Bureau wants to give borrowers and servicers more tools and time to prevent foreclosures. Despite the temporary help many homeowners have received from forbearance, the concern is mounting that there may be a spike in delinquency rates for many of those in extended forbearance. Borrowers could end up in delinquency and the beginning stages of foreclosure once mortgage moratoriums are lifted. If current trends persist, analysts predict 1.7 million households may be at risk in September 2021.
To avoid a sudden rise in foreclosures, the CFPB is proposing changes to servicing that would cover all homeowners, which include:
- Pre-foreclosure review. Depending on if you live in a lien theory or title theory state, a foreclosure is either judicial or non-judicial, meaning some states require a court procedure to start foreclosure while others don’t. One proposed change would extend the period of time before a servicer can file their first notice to officially begin foreclosure until December 31, 2021. Already servicers must wait until a borrower is 120 days delinquent on payments before making the first filing.
- Streamline solutions. The proposed changes would also cut back on current requirements that increase paperwork. Servicers will be able to enroll a borrower into a loan modification based on the evaluation of an incomplete application as long as it doesn’t increase a borrower’s monthly payment and extend the loan terms by no more than 40 years from the loan modification’s effective date.
- Timely communication. Additionally, the proposal mentions improving the delivery of important information at the right time, so borrowers better understand their loss mitigation options and the next steps they need to take.
It’s uncertain whether or not these changes will take place and what impact they may have on reducing foreclosures. Regardless, a homeowner currently in forbearance has some options that those during the housing market crisis didn’t: They can sell.
Selling a home while in Forbearance
While in forbearance, homeowners suspend their mortgage payments, but they aren’t eliminated. If the burden of repayment is too much, homeowners might want to consider selling their homes before the threat of foreclosure becomes a reality. Putting the house on the market voluntarily might be the most effective way to avoid foreclosure and a more favorable outcome for both the borrower and the lender.
Selling a home to avoid foreclosure
Homebuyer demand is strong in every market, and recent real estate statistics reflect the cutthroat competition. The high selling prices of homes on the market are boosting equity for all homeowners, according to a new report from ATTOM Data Solutions. A home is considered “equity-rich” when the amount owed on loans is 50% or less than the estimated market value.
Across the country, 41 states saw an increase in the percentage of homes considered equity-rich. In contrast, 49 saw a decrease in the percentage of homes that were seriously “underwater,” meaning that the homeowner owed more than the current market value of the home.
Between the high prices that homes are fetching and the high level of equity in the average home, homeowners afraid of foreclosure have a good opportunity to sell now.
When discussing the report, Chief Product Officer Todd Teta of ATTOM Data Solutions warned, “[The level of equity-rich properties] may shift once the foreclosure moratorium is lifted, and that’s something we’re watching, partly because it could limit equity gains and draw people underwater. For now, though, the equity picture remains one of many signs that the long U.S. housing market boom keeps charging ahead.”
No one can predict what will happen, and effects from the CFPB to curb massive foreclosures may spare many worried homeowners. Still, timing is everything, and it’s a good time to be a seller.
Getting the right payoff
When selling a house, it’s important to get the right amount for the loan’s payoff. Regardless of the homeowner’s payment history, getting a mortgage lien released properly requires this step.
There’s no public record of a homeowner electing to be part of a forbearance program, but it could still affect title and escrow work. The final payoff could be much higher than expected because of fees and interest added, resulting in potential delays. If homeowners in forbearance decide to sell, alert your real estate agent about your status. It’s important that title professionals receive information regarding forbearance as soon as possible to ensure the closing runs smoothly.
Forbearance shouldn’t cause too much trouble as long as the proper payoff information is obtained from the current lender, mortgage servicer, or attorney.
Learn more about what happens to a mortgage after the sale of a property or refinance. Listen to the newest episode of Title Talks!
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