To Forbear or not to Forbear: What You Need to know about the CARES Act

Having heard many rumors circulating on the internet, and conflicting information from loan officers and servicing companies, including one angry viral rant about balloon payments on facebook, I decided it was imperative to find out the truth behind what the CARES Act stimulus package affords borrowers on the mortgage front, and the protections that lie therein. After substantial research and having consulting with trusted resources, I intended to write a blog entry to clarify things for my readers a few days ago. But… life got in the way. And then this morning my husband forwarded me an article from WSJ entitled “Getting a Mortgage Payment Break Isn’t the Boon Many Expected” which was a psuedo-exposé on mortgage companies that are basically lying to people about forbearance repayment terms in an effort to discourage them from taking advantage of the mortgage provisions within CARES Act. But the central message was still muddled and laced with inconsistencies (as you can tell from the title of the article alone). While the article calls out the mortgage companies, who are falsely telling consumers that a balloon payment will be due at the end of any forbearance term, it is less clear on explaining what actually does happen at the end of a forbearance period. This is more due to the evasive and equivocal responses of the mortgage companies and investors, and ultimately the CARES Act itself (which the author cites as confusing), than to any inadequacy in the journalism.

The CARES Act, for those of you who are unfamiliar, is a stimulus relief package put forth by Congress to bolster various factions of the economy. The mortgage relief piece of this act enables borrowers to forbear, or not pay, their monthly mortgage payment for up to a year with no questions asked. ordinarily, when you stop paying your mortgage, the foreclosure process will commence within a few months. However, the government has mandated a moratorium on foreclosures for all government backed loans (which accounts for the majority of them) thereby enabling people to take advantage of the mortgage relief element of the COVID stimulus. The problem with this noble gesture from Congress is that they left the repayment terms nebulous, with no clear directive on how those missed payments will be made up. As a result, it’s seemingly entirely at the discretion of mortgage companies as to how they will collect. But is it really?

As you likely have heard by now, “forbearance is not forgiveness.” Your debt does not go away, it is just delayed for a period of time. Many borrowers who were either furloughed or laid off sought to take advantage of this only to be threatened by their loan servicing company that they will be on the hook in the form of a balloon payment of the missed installments at the end of the forbearance term. Is this true? Well, mostly NO.

Here’s the thing: loan forbearance is nothing new. It is not a novel concept developed by Congress and established by CARES. People who are in dire financial straights have always had the opportunity to stall loan payments until they got back on their feet. It’s a practice that’s encouraged in lieu of simply going into default. The only difference is there was a process by which the borrower would be qualified and vetted for the ability to do so without being in default. Now, there is no vetting process, and anyone can simply not pay their loan. For those who lost income due to COVID and need to temporarily hold mortgage payments, this is a fast track to avoid the hassle of the qualification process. When the forbearance period is over, these borrowers WILL NOT, and I repeat WILL NOT have to pay the missed payments in a lump sum amount. This has been verified by multiple sources, including Fannie Mae, who stated plainly that anyone who is told otherwise by a servicer should make a formal complaint with the CFPB. Does this mean it’s a wise thing to take advantage of? It depends on your circumstances. If you are genuinely hard up, then yes. However, if your financial picture has not changed, and you just want to take advantage of a perceived “free ride” for a few months, then it’s risky. If at the end of the forbearance period you are assessed to not have lost income from COVID, you will be deemed a freeloader and may well be expected to cough up the missed payments in a lump sum plus interest. And this could wipe out your savings and any benefit of the forbearance. The only caveat is that you may not have an extra $10k+ laying around, and in that case, they will likely work with you to either do a loan modification, institute a re-payment plan, or in some cases – such as with VA loans – tack the money on the back end of the mortgage.

In all honesty, if we’re being real here, the last thing any bank wants to do is foreclose on a loan. It will be much more costly than your missed payments. So regardless of your circumstances, in the end they will most likely work with you in any situation to avoid a balloon payment. But does that mean you should take advantage of forebearance without merit? Consider the impact to your credit. While the credit bureaus will not record the forbearance as delinquency, they will certainly have to account for any loan modification or re-cast at the end of the forbearance term, and that will dramatically affect your borrowing potential for the foreseeable future. My advice echoes that of the mortgage lending industry: if you can make your monthly payments without hardship, continue to do so.

In my last blog (from August 2019), I stressed the importance of not succumbing to the run around of the horrible loan servicing industry when dealing with short sales, and going straight to the investor – and this forbearance situation is another example of the where to employ this strategy. If your loan servicer (the company whose name appears at the top of your mortgage statement) tells you that you will be required to pay the entire lump sum at once or be in default, immediately hang up and call the investor, usually it’s Fannie Mae or Freddie Mac. If you are unsure who owns your mortgage, call 1-800-2FANNIE (8am – 8pm EST) or 1-800-FREDDIE (8am to 8pm EST). If your loan is not owned by either Fannie Mae and Freddie Mac, your servicer will be able to tell you who the investor is. And making them aware of your intent to go straight to their boss may scare them straight.

You may be wondering, what is a morgage company or a loan servicer? A loan servicer is your mortgage company to whom you make monthly payments. Many people refer to them as their banks, but really the loan is owned by a separate entity and the mortgage companies are the administrative bodies collecting your monthly payment on behalf of the investors. So names like Dovenmuele and Mr. Cooper may be more familiar to homeowners than Fannie Mae or Freddie Mac, whom they never hear from. It’s the servicer that will give you a hard time about things like mortgage repayment, but it’s the investor that actually calls the shots. So when at odds with the servicer in a manner that cannot be resolved, it is critical that you bypass them and deal directly with the investor. Most people don’t even know that this is an option. Well, it is. And if they tell you that your missed mortgaged payments must be paid back at once, not only should you call the investor, you should submit a complaint with the Customer Financial Protection Bureau immediately.