The coronavirus pandemic has weaved two opposing narratives in the U.S. housing market. On one hand, it has buoyed home prices amid extremely tight inventory and frenzied demand. On the other, it has pushed some homeowners to a financial brink, where they cannot keep up with their monthly mortgage payments.
The share of households reporting that they had no confidence in making their August mortgage payment reached about 6% in the latest weekly U.S. Census’ Household Pulse Survey, marking the highest rate since April when the survey began. Another 9% of borrowers said they had only “slight” confidence in their ability to make a payment. This lack of certainty follows the expiration of $600 a week in enhanced jobless benefits that kept many unemployed homeowners afloat since Congress passed the CARES Act in March.
In July, according to real estate data provider Black Knight, almost 3.7 million homeowners were 30 or more days past-due on a mortgage. Serious mortgage delinquencies, those that are at least 90 days past-due, climbed to 2.25 million, up more than 1.8 million from before the pandemic.
Meanwhile, the Mortgage Bankers Association reported that 8.22% of home loans were delinquent in the second quarter, almost double the rate from the first. This was the largest increase from the preceding quarter in the four-decade history of MBA’s delinquency survey. Both Black Knight and MBA count loans in forbearance as delinquent.
A lender can typically move to foreclose on a property once payments are three-months past-due, but federal and local foreclosure bans prevent displacements for now. A federal foreclosure moratorium that covers mortgages backed by Freddie Mac and Fannie Mae, as well as FHA loans secured by Ginnie Mae, was just extended for a third time to December 31.
“Not being able to pay doesn’t mean you will go into foreclosure,” said Mark Fleming, chief economist with First American, a provider of title insurance, settlement and risk solutions. “There are other options.”
Mortgage experts urge struggling homeowners to let their mortgage servicers know if they can no longer afford their home loans, ideally before they lapse on their obligations. Proactive communication can lead to more and better options for borrowers without damaging their credit scores as much as skipped payments.
Here are some of the options for remedying or altogether avoiding a mortgage delinquency and, ultimately, prevent a foreclosure.
According to the CARES Act, homeowners with government-backed loans can pause their mortgages for up to a year due to pandemic-inflicted adversity such as a job loss, income reduction or coronavirus illness. Most private lenders also now offer forbearance plans. Yet, the Urban Institute reported that a little more than half a million homeowners who have fallen behind their mortgage payments since the pandemic began had not requested forbearance, despite being eligible.Many had not asked to pause their mortgages simply because they were not aware it was an option, according to a housing counselor survey released last month by the National Housing Resource Center.
“If a homeowner can’t make their mortgage payment the day it’s due, forbearance is the right option to immediately remedy the situation,” said Yvette Gilmore, head of servicing product strategy at mortgage solutions provider ServiceLink.
No proof of hardship is required for COVID forbearance. When homeowners exit forbearance, they work with their lender on a repayment plan, either paying a lump sum, paying extra monthly until caught up or attaching extra payments to the end of the loan. While private lenders’ policies vary, those servicing mortgages secured by Freddie Mac and Fannie Mae cannot demand immediate full repayment, which some banks did at first, drawing criticism.
“An important thing to note is that you either pay now or you will have to pay later,” said David Druey, Florida regional president at Centennial Bank. “Even when you are in forbearance, interest will continue to accrue and be added to the end of the loan or distributed among monthly payments, therefore increasing them.”
While in forbearance, homeowners can make partial payments and set up individual payment plans with their lender.
A loan modification permanently changes a mortgage by lowering the interest rate or increasing the term length. Today, such options come with caveats. Lenders may place eligible mortgages in forbearance before agreeing to modifications. Most banks may not even consider a modification unless the borrower has defaulted, or missed three or more payments, said Sebastian Jaramillo, partner with law firm Wolfe Pincavage, which specializes in real estate.
Loan modifications require documentation, such as bank statements, tax returns and pay stubs, to establish the borrower’s ability to pay. “From the lender’s perspective, they don't want to modify your loan unless you can prove that you can pay the modified amount,” said Jaramillo. “It is almost the same as when you're applying for your initial loan approval.”
While new mortgages and refinances allow borrowers to shop around, loan modifications commit homeowners to their current lender, said Chris Diamond, senior director, financial products at mortgage provider Better.com. A modification can also hurt a homeowner’s credit score.
If borrowers have not yet skipped a mortgage payment, they might be able to refinance to decrease their interest rate, extend the term and even take out cash against the equity they have amassed. Refinance activity has boomed during the pandemic as homeowners rush to seize historically low mortgage rates.
“If homeowners are still current and they still have employment but their income has decreased, a refinance is a great option,” said Diamond. “If they have lost their job, they wouldn’t qualify.”
The government-sponsored mortgage buyers Freddie Mac and Fannie Mae recently announced a new fee for refinances, which will take effect in December instead of next week as originally planned. The charge does not apply to refinances on loans less than $125,000, a half of which belong to low-income homeowners who are most at danger of COVID-related financial misfortune. For the average refinance mortgage of $300,000, the fee is estimated to add roughly $1,500.
With the housing market on fire, prices have risen, meaning an obvious option for some money-strapped owners is selling. “If you have sufficient equity in your home, then you can sell your house, pay off the mortgage, which would mean either buying a less expensive house with a new mortgage that you can afford or renting for a while,” said Fleming.
Homeowners who decide to sell, though, will have to move fast in order to avoid falling behind. With a dire inventory shortage in many markets and home shoppers waging bidding wars, a quick and profitable sale may be quite feasible, assuming the property is correctly priced.
If a homeowner is already in default, however, the lender may approve a short sale that typically does not allow the borrower to sell the residence for more than what is owed on the mortgage. A borrower may not qualify for a short sale if she has already declared bankruptcy or if the lender is to receive a big enough insurance payout to pursue foreclosure, among other factors. When a short sale does happen, the lender handles negotiations with potential buyers.
Another possibility for homeowners is to transfer ownership of the property to the lender to settle the outstanding mortgage in a process called deed in lieu of foreclosure. While both a short sale and a deed discharge can tank a homeowner’s credit score, their financial blow is likely to be less severe than a foreclosure.