All That Glitters Is Not Gold
The COVID-19 pandemic (a/k/a the “corona virus”), has hit very close to home when it comes to homeowners being able to make their mortgage payments on time (or at all). Where many Floridians are being furloughed or laid off from their employment, there is increasing anxiety over how that 1st of the month mortgage payment is going to be made. The good news is that many mortgage lenders are attempting to make accommodations. In particular, servicers of Fannie Mae and Freddie Mac mortgage loans have been specifically directed by the Federal Housing Agency to be more flexible with their borrowers, including reducing or suspending mortgage payments. The reduction or suspension of mortgage payments generally refers to “deferment” and“forbearance”.
However, deferment and forbearance are not the same thing. While deferment and forbearance can both serve to postpone mortgage loan payments, the big difference is that deferment is often (but not always) an interest free postponement of the payment(s), where forbearance typically increases the amount a borrower owes. In all instances, the borrower must first contact the mortgage servicer; the mortgage servicer will not contact the borrower. If the borrower just stops making payments, the loan will be treated as if it is in default. That is not good, particularly where these programs are being made available to borrowers. Provided the borrower contacts the mortgage servicer, a discussion will follow where the servicer will explain the options to the borrower.Generally, the lender will not report a past-due status to the credit agencies, and the deferred payments will not appear as having been missed.
A Deferment happens where a lender agrees to lower the monthly mortgage payments for a specific period of time. The lender decides how long the deferment period will be, how much the monthly payment will be reduced,and how the borrower will ultimately pay the deferred amount. Once the deferment period comes to an end, the borrower is required to pay back the amounts deferred by either 1) making a lump-sum payment, or 2) by adding the monthly payments deferred to the end of the mortgage term. This is where extreme caution needs to be exercised. The borrower does not get to choose; the lender will decide. Borrowers need to do their best to be firm with their servicer to make their best case for why a deferment is merited. If successful, the balance of the missed payments will come due on the earlier of the mortgage maturity date, the pay-off date (for a refi), or on the sale of the property. The term of the loan and payment schedule remain unchanged.
Forbearance may be an option for a borrower that does not otherwise qualify for a deferment. When a loan goes on forbearance, the borrower is permitted to pause the loan payment(s) for a certain period of time. However, during the forbearance period interest on the paused payment(s) continues to accrue. The accrued interest will be capitalized (that is to say, it will be added to the principal balance of the loan), or the borrower will be required to pay the total of the paused payments at the end of the forbearance period.If a borrower qualifies for forbearance, the borrower and lender will negotiate 1) the length of forbearance period, 2) the amount of the reduced payment (or, suspension of the entire payment), and 3) repayment terms at the end of the forbearance period. Depending on how successful a borrower is in negotiating a forbearance,the options will be for the borrower to make a lump sum payment for the total amount of the paused payments(a reinstatement), increase the amount of the resumed monthly payments until the total of the paused payments is repaid (a repayment plan), or seek a loan modification (a modification).Borrowers need to be careful to consider the entire offer the lender makes. Many times borrowers are euphoric when told that they will be permitted to pause one or more mortgage payments; however, they gloss over the repayment terms. As difficult as it may be to remain current with mortgage payments during the height of the corona virus, it will be even more difficult to make a large lump sum payment (the total of the skipped payments),when the pandemic subsides and the forbearance period comes to an end.
Also, to add insult to injury, borrowers that enter into a forbearance agreement are much more likely to have difficulty refinancing their mortgage because of the forbearance. Forbearance is not looked upon favorably in the mortgage industry, notwithstanding that a borrower’s credit score has not been adversely affected by it.
With the current circumstances, deferment appears to be the preferred method for postponing monthly mortgage payments, particularly if the lender is willing to tack on the missed payments to the end of the loan and extend the maturity date by the number of missed payments. Forbearance is not the preferred method, and should only be considered if deferment is not available.
As always, should you have any questions navigating the differences between deferment and forbearance, we urge you to contact your local real estate attorney, or one of the attorneys at Berlin Patten Ebling, for additional guidance.
Mark C. Hanewich, Esq.
Berlin Patten Ebling, PLLC