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Help Desk: How to seek forbearance on your mortgage

Ask the Expert Uncategorized
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For many mortgage holders, all it takes is a phone call. —Adobe Stock

A collaboration with The Boston Globe’s Help Desk:

While there’s no end in sight to the coronavirus pandemic in the United States, the same can’t be said for two key pieces of housing-relief legislation in Massachusetts. Statewide moratoriums on both evictions and foreclosures, which Governor Charlie Baker signed in April and extended in August, were set to expire on Oct. 17.

That’s a worrisome prospect for residents who have lost a job or a big portion of their income due to the virus itself or its economic impacts, and it’s raising concerns of an impending housing catastrophe. A more ambitious bill currently before the state Legislature, called the Guaranteed Housing Stability Act, would halt evictions and foreclosures statewide for another year or more and provide income relief to small landlords, but has yet to receive a vote. Even so, there are still some support mechanisms in place for those unable to make rent or mortgage payments.

For example, in September the Centers for Disease Control and Prevention issued its own halt on evictions through the end of 2020, to prevent overcrowding and homelessness that could further spread COVID-19. But the federal protections are less robust than those offered by the Massachusetts moratorium: Tenants must submit a signed declaration to their landlord as soon as they expect to miss their rent payment, and experts suggest seeking legal help because the order is open to interpretation at the local level.

Struggling homeowners, meanwhile, have their own backstop in place to stave off foreclosure. As part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act passed in March, homeowners experiencing economic hardship due to COVID-19 can request up to 180 days of mortgage forbearance without penalty, after which they can request an additional 180 days if needed.

Forbearance offers a temporary break from making loan payments during a rough patch (it’s often employed after natural disasters). And for the majority of mortgage holders — those whose loans are backed by Fannie Mae, Freddie Mac, or Ginnie Mae — all it takes is picking up the phone, said Marina Walsh, vice president of industry analysis at the Mortgage Bankers Association. “The only real requirement is that the borrowers have to call their servicer and say they have a COVID-related hardship,’’ Walsh said. “The purpose was to make it as easy as possible for borrowers to get onto a forbearance plan without a lot of red tape and wrangling.’’

Under the CARES Act, that literal call for help initiates the forbearance process immediately, said Mounzer Aylouche, vice president of homeownership programs at MassHousing, the state’s housing finance agency. “We don’t ask for more details. We don’t have them fill out an application. We don’t make it difficult for them, because that’s not what the intent or the spirit of the law is,’’ Aylouche said. It’s a call some borrowers are afraid or ashamed to make, he added — but your lender won’t know you’re in trouble unless they hear from you.

It’s also just the first step in a cooperative process. “The first thing we do is really explain very clearly what forbearance means,’’ Aylouche said. A lot of borrowers conflate the term with loan forgiveness, he said, and are under the mistaken impression that the government will relieve them of their loan payments. But forbearance isn’t a delete key — it’s more like a pause button. “Forbearance is a plan that allows for reduced or suspended mortgage payments for a designated period of time,’’ he said. You’ll still have to pay the money back, eventually.

And exactly how that money gets repaid is an important detail to ask about upfront, Walsh said. While the simplest way to exit forbearance is to catch up on missed payments in one lump sum, there are alternatives to that daunting prospect. “I think some borrowers are fearful that under a forbearance plan, that’s the only option, which is not true,’’ she said.

Under the CARES Act, most borrowers should be eligible for a loan deferral, which essentially tacks the forbearance balance onto the end of the mortgage — due in a balloon payment when you sell, refinance, or otherwise reach the end of your mortgage term. “It’s an interest-free loan, basically,’’ Walsh said.

Roughly a quarter of borrowers who exited forbearance in September were put on such a deferment plan, according to MBA surveys. Another 28.5 percent canceled the request and stayed current on their payments. “They kind of used the forbearance plan as an insurance policy,’’ Walsh said. Perhaps they were expecting to be furloughed for longer than they were and found themselves able to continue making full payments while in forbearance.

Requests for forbearance have been slowly tapering off since a surge this spring. But 6.81 percent of residential mortgages remained in forbearance in early October, according to an MBA report, accounting for an estimated 3.4 million homeowners nationwide.

MassHousing services mortgages for more than 25,000 low- and moderate-income borrowers in the Commonwealth, Aylouche said, and 1,707 of them entered forbearance between March and August. Some 700 others filed a claim using the agency’s unique MI Plus mortgage insurance, which covers up to six months of mortgage payments if you qualify for state unemployment benefits. Aylouche expected to see more MI Plus claims, given those funds never need to be repaid. “[But] we found not many people are fully unemployed,’’ he explained — meaning they may have lost only a portion of their income, as opposed to being laid off entirely.

Borrowers with privately backed mortgages, including those with jumbo loans, also can request forbearance if they’re having trouble. But private mortgage holders aren’t bound by the same rules as government-sponsored entities like Fannie Mae, so terms can vary.

For example, some banks may insist that borrowers cover all missed payments in a lump sum in order to be reinstated, or spread out the balance with higher payments over 12 months or more. “Many of the banks followed the spirit of the CARES Act, but it really is more dependent on the individual bank in terms of how they set it up and for what period of time that forbearance could be,’’ Walsh said. If you’re not sure who owns your mortgage, call your loan servicer and ask; the lender is required to tell you.

Because the CARES Act is still relatively new, borrowers might get inconsistent information from their lender, said Jennifer Lane, a certified financial planner with Compass Planning Associates in Brookline. “Keep a record of who you spoke with and what they said,’’ she suggested, and speak with a few different customer service representatives to confirm the information.

It’s also important to keep an eye on your credit report during and after forbearance, Lane added. “Delayed payments under this program are not supposed to be reported as missed or late payments, but check your report to be sure there were no errors,’’ she said. If your lender mistakenly reports you for a late payment while you’re in forbearance, write to the credit reporting agency to dispute the error so it doesn’t negatively impact your credit score.

A forbearance is meant to be temporary, a break to help borrowers withstand a passing crisis. But if someone’s financial picture changes more permanently — if they lost a job due to COVID and had to accept a new one that pays much less, for example — loan modification may be an option. That means the lender could extend the loan term or reduce the interest rate to make the monthly payment more manageable.

Unlike a refinance, a loan modification is simply an adjustment to the original mortgage note, not an entirely new loan. “In layman’s terms, it’s a reset on your mortgage,’’ said Michelle Crockett, a foreclosure prevention specialist with the Massachusetts Affordable Housing Alliance. As such, there are no associated fees or closing costs. However, a loan modification isn’t guaranteed; it needs to be approved by the investor who owns your mortgage, whether that’s Fannie Mae or a bank.

If you’re seeking a loan modification, Crockett recommended speaking with a housing counselor first. He or she will walk you through your finances to make sure you have the right information and numbers at hand, Crockett said, and help you establish a crisis budget. “With some of the banks, their loss mitigation department is also their collections department,’’ she cautioned, so it’s important that buyers approach the conversation fully aware of what should be available to them. (You can search for HUD-approved counselors through the Consumer Financial Protection Bureau’s website.)

With home values continuing to rise and mortgage rates at historic lows, refinancing could be another strategy to lower mortgage payments. About 11 percent of the borrowers who exited forbearance in September did so by closing out their loan — meaning they either sold their home or refinanced.

However, it’s hard to qualify for a new loan when your income has taken a hit or you don’t have a continuous record of employment over the past 12 months. If you return to the same job after a three-month furlough, Crockett said, “[lenders] don’t see that as a break in employment.’’ But someone who gets laid off and ends up taking a different job afterward may not qualify for refinancing, due to the recent gap in employment.

A final option — one that wasn’t available to most homeowners during the financial crisis, when home values tanked and left people underwater on their mortgages — is selling into this strong real estate market and either downsizing or renting.

“That was not an option when we think of the Great Recession,’’ Walsh said, “because so many properties were underwater. But now we’re in a situation where a lot of these borrowers have equity in their homes, so a good option might be for them to sell their home … and then they can take that equity in their home and use it to sort of restart.’’

Basically, forbearance is a smart idea if your inability to pay is indeed only a temporary setback. “But don’t use it as an excuse to ignore a difficult situation,’’ Lane cautioned. “If you don’t expect your situation to improve, this may be the time to sell a home that is no longer affordable. Forbearance can buy you time to do that without hurting your credit.’’

Jon Gorey blogs about homes at HouseandHammer.com. Send comments to jongorey@gmail.com. Follow him on Twitter at @jongorey. Subscribe to our free real estate newsletter at pages.email.bostonglobe.com/AddressSignUp. Follow us on Facebook, Instagram, and Twitter @globehomes.