When a homeowner is experiencing financial hardship to pay the mortgage, the mortgage servicer or lender allows the homeowner to pause or reduce the mortgage payments for a limited period of time while the homeowner can regain his or her financial footing.1 Such temporary pause or reduction in mortgage payments is forbearance. Since Congress has passed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) in March 2020, a homeowner is eligible for forbearance for up to 12 months.2
It is no doubt that many families are experiencing financial hardships during the covid-19 crisis. According to the Pew Research Center, as of late March, about half of Americans considered the pandemic to be a major threat to their personal finances.3 In response to such large-scaled financial hardships experienced by all Americans, Congress passed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) in March 2020. Under the CARES Act section 4022, a homeowner would be entitled to a forbearance up to 12 months, if his mortgage is federally owned or backed.4
Source: GETTYHowever, what is not being told to the borrowers asking for forbearance is that signing up for mortgage forbearance could potentially set them up for serious problems in the not-too-distant future. Although CARES Act requires the lenders or servicing companies to allow payment delays for up to 360 days on federally backed mortgages, the CARES Act does not set up rules for lenders and the servicing companies when it comes to what happens once the forbearance period ends. Therefore, once the forbearance period ends, individual lenders and servicers can set up their own rules to demand how their borrowers must make up the delay payments. According to John Ulzheimer, an Atlanta-based credit expert formerly of FICO and Equifax, the lender or servicer could demand that the borrowers pay back the deferred amount all at once or in an otherwise expedited manner and indeed, borrowers from multiple national banks have reportedly been informed of the need to repay any delayed payments in a lump sum at a future date.5
Forbearance during the COVID-19 crisis might also impact borrowers’ credit. Section 4021 of the CARES Act amends Section 623(a)(1) of the Fair Credit Reporting Act by instructing the lenders to report that borrowers are “current” on their credit obligations when a special payment accommodation (like a forbearance) is in place specific to COVID-19. Therefore, borrowers would not need to worry that delaying their payment may affect their credit in a negative way by entering into a forbearance agreement with their mortgage lender. However, there is a notable exception to such credit protection. If a borrower’s credit obligation or account has already been delinquent before s/he requests a payment accommodation, then her/his credit obligation would still be maintained as delinquent even if during the period in which the accommodation is in effect.6
Therefore, although Congress passed the CARES Act as a tool to help the borrowers get over their financial hardships caused by the COVID-19 crisis, borrowers should still keep in mind that such mortgage forbearance is not mortgage forgiveness and also monitor their credit rating profile. According to the Federal Trade Commission, you're entitled to one free copy of your credit report every 12 months from each of the three nationwide credit reporting companies.7 Borrowers should take a more proactive role to ask their lenders or servicing companies about their individual rules of forbearance under the scheme of the CARES Act, and lenders should also provide transparent forbearance disclosure to borrowers up front and throughout the entire forbearance.
Tags: CARES Act, covid-19, Federal Trade Commission, forbearance, mortgage, real estate