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The Rebound: Pros and Cons of Mortgage Forbearance

Program helps homeowners avoid foreclosure
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Posted at 8:22 AM, May 12, 2020
and last updated 2020-05-12 11:47:33-04

SAN DIEGO (KGTV) - As unemployment soars in the US, many people are looking for ways to stretch their monthly budget. Millions of them have turned to mortgage forbearance.

Under the CARES Act, people with government-backed mortgages can enter forbearance, allowing them to suspend or lower their mortgage payments during times of financial hardship. It can last for up to 180 days. They can also ask for an extension for another 180 days. But you must contact your mortgage provider to request a forbearance.

According to the financial tracking firm Black Knight, more than 3.8 million homeowners have entered forbearance plans with their mortgage provider, as of April 30. That represents 7.3% of all mortgages in the US.

"Forbearance is not debt forgiveness. Nobody's giving you any money," says Mark Goldman, a Loan Officer at C2 Financial Corp. "Forbearance means they're forbearing the current payment that is due. But, somehow, that payment that's been deferred is going to have to be repaid."

The Consumer Financial Protection Bureau says people have options for how to pay back the money owed during a forbearance.

People can pay it in one lump sum at the end of the forbearance period, but that's not required. They can also work out a payment plan to increase their monthly mortgage payments to repay the amount of the forbearance. They can also extend the term of their mortgage to add the missed payments to the end. It all depends on the agreement each homeowner works out with their mortgage provider.

"If you're in financial difficulty, contact your service provider," says Goldman. "Make sure to ask questions; What can we do? How do we repay it at the end."

But, while forbearance can be a life-saver for people with mortgages, it can also make it harder for people looking to refinance their mortgage. Interest rates are at historic lows, and people are saving money by refinancing. That may not be an option if you haven't repaid the amount of the forbearance.

"If somebody was contemplating for a refinance, and they go into forbearance, they may not be able to refinance that house until maybe 12 months after they get current on the loan," says Goldman.

The surge in forbearances could also hurt the housing market, creating cash-flow and liquidity issues for major lenders. Black Knight says that forbearance requests are declining, and could peak at around 4.5 million mortgages this summer. But Black Knight also says as many as 8 million mortgages could go into forbearance if the coronavirus pandemic continues. That would put 16% of all US mortgages in forbearance.

Goldman explains that would make it very difficult for people looking to buy a home to find willing lenders.

"If a lot of people go into (forbearance), that's going to shut off the cash flow in the mortgage world," he explains. "That's going to drive up the price of mortgages. It's going to drive up the credit requirements. It's going to make it more difficult for people to get loans."

The most important thing to do, says Goldman, is call your mortgage service provider to discuss your options.