Forbearances aren’t an entirely new concept. During the Great Recession, lenders commonly worked with delinquent borrowers to enter into these agreements. The lender would agree to postpone the filing of mortgage foreclosure proceedings, thereby giving the homeowner a chance to bring their mortgage payments up to date.
The process became formalized during the coronavirus pandemic. With millions of Americans losing jobs and incomes, and many unable to keep up with their mortgages, Congress passed the Coronavirus Aid, Relief and Economic Security (CARES) Act, which allows homeowners to ask for forbearance on federally backed mortgages for up to a year. Many lenders of privately held mortgages have followed suit.
Forbearances, however, are a growing cause of concern in the mortgage industry. Title companies, for instance, need to make sure that all deferred payments are collected at the time of closing or they face financial risks of their own.
Mortgage originators will want a broad understanding of the forbearance process to be able to discuss the concept with potential clients. Originators also should have a working knowledge of how forbearances are impacting other parts of the mortgage ecosystem, including title companies.
Under the CARES Act, homeowners can gain temporary relief — up to a maximum of 12 months — on their mortgage payments. At the end of the forbearance period, the owner must pay the lender the balance of the postponed mortgage payments.
When and how the borrower will pay these postponed payments depends on the details of the forbearance agreement. These details are based on such factors as the type of loan, investor requirements and the identity of the loan servicer. The homeowner could make a lump-sum payment for all missed mortgage payments. Alternatively, the repayment could occur over three, six, nine or 12 months on top of regular payments.
Another option includes attaching the extra mortgage payments to the end of the original loan term, in effect lengthening the loan term. Homeowners working with their servicers also could add a lump-sum payment that is due when the last mortgage payment is made, or when the home is sold or refinanced.
For the title-insurance industry, these forbearance agreements lead to immediate questions. Assume that a homeowner works out a forbearance agreement with their lender but then decides to sell their home or refinance their mortgage before the postponed mortgage payments are made. What if all deferred payments are not collected at closing? The unfortunate answer is that title-insurance companies could suffer losses in paying off renegotiated loans.
These losses can arise under several scenarios. One example is if the mortgage payoff letter does not include all amounts due under the forbearance agreement. Another example is when the forbearance agreement provides for a different entity to service the postponed payments, resulting in the need for an additional payoff statement. A third scenario involves a forbearance agreement that provides for the creation of a junior mortgage or secondary lien, which also requires an additional payoff statement.
Originators should know what title companies are doing to protect themselves. To avoid forbearance-agreement losses when closing the sale or refinance of a home, many title companies are adhering to several steps.
First, title companies are asking borrowers upfront if they have entered into any forbearance or loan modification agreements. Title companies are carefully reviewing mortgage payoff statements and looking for signs of forbearance, such as separate line items for mortgage principal and interest, with interest being calculated pursuant to a specific date. They’re also looking for a line item listing additional contractual fees and outstanding charges, or a clearly disclosed line item for deferred principal balance.
These companies also are examining title commitments, looking for recorded agreements or recorded junior mortgages that indicate the possible existence of deferred mortgage payments. Lastly, title companies are including language in the mortgage payoff request such as, “Please furnish a statement of the amount necessary to pay in full said mortgage, including any amounts deferred due to a forbearance agreement or loan modification agreement.” Although forbearance agreements have once again become a lifeline for homeowners, title insurers need to be vigilant at closings to make sure any deferred payments in these circumstances are paid.
Title-company examiners and closers are not the only ones who should be aware of the concept of forbearance. Mortgage originators will want to be prepared when talking with borrowers about this subject.
In these discussions, borrowers may ask a number of questions, such as, “If I lose my job because of the pandemic, will I also lose my home to foreclosure?” “I don’t want to do a short sale; I want to stay in my home. Are there any other options?” If mortgage originators are familiar with the latest forbearance-related news, they may feel comfortable about talking with their clients about these points as a possible alternative to foreclosure.
If originators choose to discuss forbearance with their clients, they may want to read Mortgagee Letter 2020-30, which was recently released by the Federal Housing Administration (FHA). This letter discusses FHA’s underwriting guidelines for mortgages involving borrowers who were previously granted a forbearance.
This letter notes that the borrower of a purchase loan or non-cash-out refinance may be eligible for a new FHA mortgage after being granted a forbearance if, among other things, the borrower has exited the forbearance plan. The borrower also must subsequently make at least three consecutive monthly payments. ●