Beyond Coronavirus Stimulus Act Relief, Struggling Homeowners Have Mortgage Payment Options - The Wall Street Journal

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‘You use all these different approaches to reducing the payments,’ said Michael Fratantoni of the Mortgage Bankers Association.

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By

Julia Carpenter

• Biography
• @juliaccarpenter
• julia.carpenter@wsj.com

Aug. 7, 2020 9:22 am ET

As part of the coronavirus relief effort, Congress passed a $2 trillion stimulus package in April with provisions for those struggling to make their mortgage payments. Lenders were supposed to allow forbearance for homeowners with federally-backed mortgages.

Forbearance allows homeowners to suspend their monthly payments when they experience a virus-related hardship without the usual consequences of delinquency or even foreclosure. The flood of requests have mortgage servicers working overtime and homeowners waiting hours on the phone.

As states reopen and shut down again, Michael Fratantoni, chief economist and senior vice president at the Mortgage Bankers Association, says more people are investigating their options.

“You use all these different approaches to reducing the payments for the borrower for a period of time while they’re getting back on their feet, always with the intent to set them on a path from serious distress,” Mr. Fratantoni said. “Over time, you get them back to making their regular payment once again and ultimately paying off the loan.”

Here’s what’s available for those struggling to make payments now.

Extend Forbearance

Homeowners with federally-backed mortgages are allowed to extend forbearance for up to 12 months, said Donna Corley, executive vice president and head of single-family business at Freddie Mac.

She recommends people contact their servicer to ask how they can set up an extension. The process should be very similar to what they experienced when they first asked about forbearance several months back.

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Mr. Fratantoni said his group has seen “a lot of extension activity” and he predicts even more to come as the crisis continues. While the share of loans in forbearance has consistently declined since April, more than half of the borrowers in forbearance are already in an extension, according to the Mortgage Bankers Association.

“People are either not back to work or they still haven’t recovered income, because their hours were cut or their income was reduced. That hasn’t turned around,” he said. “I think the extension [activity] is saying you have a lot of homeowners out there who are not stable yet.”

Those who have already been approved for forbearance are very likely to be extended, Mrs. Corley said, even if their financial situation has worsened since they were first approved.

Payment Deferral Plans

Some homeowners may be back to work but in a much different capacity, with fewer hours or reduced income. As they come out of forbearance, homeowners may need help making up the payments they missed.

The “evaluation hierarchy” at Freddie Mac walks borrowers through several options: a lump sum repayment, repayment plans and payment deferral. Under the Cares Act, for those seeking payment deferral the interest accrues at the same rate as though the borrower had been making payments.

For most of these options, those with federally-backed mortgages have to attest to a Covid-19 hardship. For a deferral, missed payments during forbearance can be delayed for the life of the loan. That amount comes due when you pay off the mortgage, refinance the mortgage or sell the house. This is a very attractive option for many people right now, Mrs. Corley says, because it allows people to buy some time as they manage the Covid-related fallout.

Modify Your Mortgage

For millions of Americans, their old jobs are gone temporarily or permanently. For these homeowners, Mrs. Corley recommends mortgage modification.

While refinancing your mortgage replaces your previous mortgage with an entirely new loan, mortgage modification changes the terms of your existing mortgage to help homeowners make their payments. Traditionally, they have been put to use for those affected by national disasters. But now, Mr. Fratantoni said, these programs could help those struggling with the Covid-related economic downturn.

Mortgage modification isn’t for those who are able to make payments and simply looking to take advantage of the low interest rates, Mrs. Corley said. This option is for those who wouldn’t be able to afford the overhead costs of refinancing and are potentially at risk for missing payments or losing their home, although those transitioning from an adjustable-rate to a fixed-rate mortgage are also able to use it to retool the terms of their loan.

“For the folks who haven’t been affected by Covid, I say interest rates are at all-time historic lows—go refi,” she said. “People who have income should absolutely take advantage of the all-time low interest rates, but they’re much better suited to go look at refinancing.”

There are some potential pitfalls to these options. Missed payments typically lower credit scores, and mortgage modifications will appear on credit reports and could impact people’s ability to qualify for future loans. If the modification extends the life of the loan, homeowners could pay more in interest over time. Under the Cares Act, requesting forbearance and missing payments on federally-backed mortgages as a result of the pandemic shouldn’t affect your credit score, so make sure to keep an eye on it.

Mr. Fratantoni recommends first contacting your servicer to ask about the different modifications available. Those with federally-backed mortgages should attest to a hardship related to Covid-19, according to Freddie Mac.

Some could extend the life of the loan, allowing homeowners more time to make up the payments they missed in forbearance. Others could reduce the interest rate for a period of time or change the loan from an adjustable-rate to a fixed-rate mortgage. Freddie Mac uses one or a combination of these options, after initiating a conversation with the servicer and the borrower. According to Freddie Mac, it can reduce a monthly mortgage payment by as much as 20%.

Changing his mortgage from an adjustable rate to a fixed rate appealed to Michael Beach, a homeowner in the Washington, D.C., area. When he and his wife began looking to modify their mortgage this spring, interest rates had already dropped significantly from when they purchased their home in 2011. Then rates dropped again, approaching an all-time low. After talking with their servicer, the Beaches realized they could save up to 10% of their monthly payment by modifying from an ARM to a fixed-rate mortgage.

“For us, it was a no-brainer,” he said. “It’s worth the follow-through.”

Write to Julia Carpenter at Julia.Carpenter@wsj.com

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