As more homeowners exit forbearance, mortgage loan servicers are expected to step up.
Under the CARES Act, the massive coronavirus relief bill that was signed into law last March, many homeowners are entitled to mortgage forbearance if they request it. Loan servicers cannot so much as ask for proof of financial hardship. During forbearance, monthly mortgage payments can be paused, and borrowers cannot be reported to the credit bureaus as delinquent on those payments.
But forbearance is going to run out eventually — as of now, it lasts a maximum of 18 months — and once it does, many homeowners may find themselves unable to keep up with their mortgage payments. And at that point, loan servicers will be expected to step up and help.
The Consumer Financial Protection Bureau (CFPB) is warning mortgage loan servicers they’ll need to work with struggling borrowers to avoid foreclosure. There’s a federal foreclosure ban in place through the end of June. But once it expires, homeowners could lose a lot of protection. (The CFPB is actually fighting to extend that moratorium through the end of the year so that foreclosures are off the table until 2022.)
At the same time, homeowners who entered forbearance early in the pandemic could end up having to exit it this fall. That’s a few months after the foreclosure ban is set to run out, assuming there’s no extension. That could, in turn, create a massive foreclosure crisis if loan servicers don’t cut borrowers some slack.
So how can loan servicers help? For one thing, the CFPB wants them to present borrowers who can’t pay with alternatives to foreclosure. In some cases, refinancing a mortgage could make it easier to keep up with. Though borrowers will generally need to get current on their payments first.
In other cases, the best solution may be loan modification, where the terms of an existing mortgage are altered to make that loan more affordable. For example, if a given borrower has 20 years left on his or her mortgage, that borrower’s loan servicer might agree to let that loan get repaid over 30 years so each monthly payment is reduced in the process.
Now under the recent $1.9 trillion American Rescue Plan, there is a limited pool of money — $10 billion worth — earmarked for homeowner assistance. That money is to be disbursed at the state level. It could help some homeowners catch up on their missed mortgage payments and stay in their homes once forbearance protection runs out. But still, loan servicers will need to be flexible with homeowners who need more aid. The CFPB is sounding a warning now — before the foreclosure moratorium runs out and countless homeowners find themselves scrambling.
Chances are, interest rates won’t stay put at multi-decade lows for much longer. That’s why taking action today is crucial, whether you’re wanting to refinance and cut your mortgage payment or you’re ready to pull the trigger on a new home purchase.