How Will Forbearance Impact My Credit?
Is Forbearance Relief Meant to Help, Unintentionally Hurting Homeowners?
Ventura County homeowners suffering from the economic fall out caused by the coronavirus were told they could delay their mortgage payments without consequence. Unfortunately, some homeowners are now finding they’re at risk of being shut out of the housing market. An important component was missed when the hurried $2.2 trillion stimulus bill was drafted by Congress in March. The legislation allowed government-backed borrowers to postpone mortgage payments for as long as 12 months if they faced financial hardships due to the pandemic. It specified that mortgage companies report homeowners in forbearance as “current” on their payments, to prevent damage to their credit scores. This stipulation didn’t take into account established policies which say consumers cannot be approved for any new loans for a full year after a forbearance ends. For example, Fannie Mae and Freddie Mac, the government-controlled loan companies that process nearly half of U.S. home lending, will not purchase forbearance mortgages. Ventura County borrowers who took advantage of the relief plan are now being told they’ll have to wait before they can refinance or even apply for a new home loan. Even borrowers who actually made their mortgage payments on time face these consequences since their property is listed in forbearance on their credit report.
The decision by lawmakers to temporarily let millions of Americans stop paying their mortgages has thrown chaos into a real estate market already decimated by the economic downturn from the coronavirus. Government and industry officials are racing to mitigate the unintended implications of forbearance legislation.
Fannie and Freddie’s policies do not account for an emergency like the current pandemic or specify how to treat affected borrowers, said Raphael Williams, a Federal Housing Finance Agency spokesman. He said the agency, which regulates Fannie and Freddie, is working with businesses to resolve the situation.
Ian McDonald, a branch manager in Hutchinson, Minnesota with Fairway Independent Mortgage, said his company recently tried to lend to someone who wanted to buy a new home. The borrower’s work hours were scaled back in March and April, but recently returned to full time. According to McDonald, the individual called his mortgage servicer to ask about forbearance but never actually missed a payment.
When a Fairway loan officer pulled the borrower’s credit, they learned he was enrolled in the Congress-approved forbearance plan. The borrower rushed to make his next mortgage payment even before it was due and asked to be taken out of forbearance. In the end, it was too late. “We believe he’s ineligible for all loans,” McDonald said. “They put this legislation in with good intentions but there wasn’t consideration of all the ripple effects that are taking place right now in real time.”
The National Association of Mortgage Brokers wants lawmakers to step up. The trade group informed Senate Banking Committee members in a recent letter that the spirit of the stimulus bill is being breached when mortgage forbearance is reported to credit rating companies, the agencies that collect and keep financial data of consumers. In an interview, NAMB President-Elect Kimber White said that stopping such disclosures would limit the repercussions of Fannie and Freddie’s forbearance policies.
Fannie and Freddie do not themselves make mortgages. They buy them from lenders and turn them into shares for sale to investors. Lenders are relying on that process to build new mortgages. So Fannie, Freddie, and government agencies that provide backstop loans ultimately determine which homebuyers can get mortgages.
Part of the issue is that many mortgage servicers, who collect money from borrowers and then make payments to mortgage-bond investors, only recently found out themselves that new loans could not be given to homeowners who took forbearance. In turn, consumers who were told they could delay their payments, were not fully made aware of the consequences
F&B Financial Group, based in St. Louis, has received calls from several customers hoping to refinance their home loans. Most did not know their forbearance request made them ineligible for mortgages backed by Fannie and Freddie Mac, according to owner Chris Fox. Fox said he found out first hand, after calling his Mortage Company, that servicers were leaving borrowers in the dark. “I went through the process with them, and pointedly asked twice, ‘So there are no negative impacts from doing this?’ and I was told, “No, sir, go ahead and do it,” he said.
Due to concerns that customers went into forbearance without being aware or informed of the risks, the problem has taken on greater significance for Ventura County homeowners.
To address the issue, Fannie and Freddie are considering shortening the time period that restricts homeowners from being eligible for new loans to as little as three month or less, especially if borrowers never missed a mortgage payment.
If Fannie and Freddie fail to take action, the broader economy could be aversely affected if a significant number of borrowers aren’t able to get financing approved to buy new homes once the pandemic ends. Moody’s Analytics Chief Economist Mark Zandi, says that a slump in mortgage refinancing wouldn’t have nearly the same negative impact on the market as the losses from home sales. Ventura County homeowners, along with Fannie and Freddie customers nationwide, will look for a quick response to this stimulus-plan snafu.