Residential Magazine

Treacherous Waters

Help your clients navigate through foreclosures in a post-pandemic world

By John Heck

Millions of U.S. homeowners remain in forbearance programs and are unable to make their mortgage payments. With these programs likely to end soon, however, clients and referral partners may turn to mortgage originators for options and resources.

The COVID-19 pandemic jolted the global economy, significantly impacting business operations across all industries. One such industry strongly affected by the virus outbreak was the mortgage space. As widespread unemployment and furloughs swept across the U.S., former President Donald Trump and Congress implemented the Coronavirus Aid, Relief and Economic Security (CARES) Act, which aimed to alleviate the economic pain of the pandemic. 

As part of the relief plan, mortgage forbearance programs were put in place that allowed homeowners to temporarily stop making payments on their loans. The goal was to help Americans navigate the situation without fear of losing their homes. These programs were set to expire in March of this year. 

Fortunately for millions of borrowers with government-backed mortgages, President Joe Biden’s administration has extended the forbearance window through June 2021. This extension provides a lifeline for borrowers in need of financial stability, offering them the opportunity to forgo mortgage payments for up to 18 months.  

As the June deadline draws closer, however, there is an increasing discussion about the future of the foreclosure landscape. Some housing-industry experts believe there will be a wave of foreclosures as U.S. homeowners fail to make their reinstated payments. Other, more hopeful pundits foresee a much smoother transition back to normal operations. This leaves the million-dollar question: What are foreclosures going to look like once the forbearance programs eventually come to end?

Alarming figure

As more Americans are being called back to work, the number of borrowers in forbearance is declining. Early this past March, only 4.9% of borrowers were deferring payments. This marked the first time since early April 2020 that this share had fallen below 5%, according to real estate data company Black Knight.

In sheer numbers, 2.6 million U.S. homeowners were in forbearance programs as of March 9, 2021. While this is still an alarming figure, it is down from 3.6 million as of October 2020. 

That being said, it would be absurd to assume that the millions of homeowners in forbearance will have no impact on default activity in the next few months. With as many as 40 million Americans losing their jobs in the first few months of the health crisis, fore-closures are likely to spike later this year. 

Looking at the state of forbearances and foreclosures once the moratoriums end, there are a few things borrowers can do to avoid losing their home.

Daunting challenge

Keep in mind that the federal forbearance programs only extended to government and government-backed loans, or about two-thirds of all mortgages in the U.S. For now, borrowers with jumbo loans, nonqualified mortgages and other loans held by private lenders have followed the federal government’s lead in offering these programs to their borrowers.

Unfortunately, with so many businesses closing due to COVID-19 restrictions, when and if the foreclosure moratoriums are lifted (which could be in June or even later this year), expect to see foreclosure rates that are two or three times higher than in 2019. Furthermore, it will probably continue to get worse in 2022 as the U.S. economy slowly recovers in the aftermath of the pandemic. 

Depending on the type of loan — whether it is a government-insured or privately held mortgage — the owner of the whole loan could proceed with recourse plans when these forbearance programs expire. This leaves many Americans with one question: “How can I prepare for the possibility of a post-program foreclosure?” 

Promising path

Looking at the state of forbearances and foreclosures once the moratoriums end, there are a few things borrowers can do to avoid losing their home. For example, as long as the borrower can demonstrate an ability to make a mortgage payment, even if it is less than the previously agreed-upon monthly payment, some homeowners will be offered a loan modification. 

These are permanent mortgage repayment plans that also are governed by timelines and certain agreed-upon contingencies. These may include a reduced interest rate, a longer repayment period, a different type of loan or any combination of these options.

With that said, there are two critical issues that consumers leaving an expired forbearance program need to pay attention to. First, borrowers must be able to demonstrate the ability to make at least a partial payment that is acceptable to the servicer. This is why finding new employment is so important to anyone who lost their job. Verifiable income is a key issue in the loan modification approval process. 

Second, consumers should maintain regular contact with their servicers so they are aware of the situation and how it is progressing. If a homeowner has not been able to find enough verifiable income to justify keeping their home, and since the current housing market is quite active, they may choose to sell and to rent a home until they can earn the necessary income to buy another property. 

Another option

Federal law provides relief for consumers who have exhausted every forbearance and/or loan modification option. Homeowners may consider a Chapter 13 bankruptcy, which can stop the mortgage collection process and allow the necessary time to set up a repayment plan for their mortgage as well as any other debt obligations. 

For example, a repayment plan could be set up for a five-year term. Bankruptcy plans have to be approved and governed by a court-appointed trustee. This means that all payments would be made to the trustee, who would then pay each of the creditors, including the mortgage holder.

Currently, the mortgage industry is full of unknowns. Homeowners still in a forbearance program should start preparing an exit strategy now. They must understand the pandemic-related eviction and foreclosure orders, and identify opportunities to avoid foreclosure while they’re trying to get back on their feet. It will take the mortgage industry a few years to recover from the pandemic, but borrowers can navigate the waters by creating a plan of action before the CARES Act ends. ●


  • John Heck

    John Heck is senior adviser of lending solutions at Capacity, a software-technology company that uses artificial intelligence to automate support for clients and employees. He has held senior-level positions at IBM, EMC², First American, Fidelity National Financial, PNC Financial and Citigroup. Heck’s passion is to transform the mortgage industry by delivering a digitally native and cloud-delivered mortgage platform, which standardizes asset creation based on investor needs while delivering a true value proposition for lenders and borrowers. 

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