Mortgage Lenders Ask Borrowers to Commit to Not Seek Forbearance
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What is the main topic discussed in this episode?
Future Money Briefing for Wednesday, August 26th. I'm J.R. Whalen for The Wall Street Journal. Homeowners have been able to put off making mortgage payments during the pandemic. Forbearance is a relief for them.
What change are lenders making at closing related to mortgage forbearance?
But it puts pressure on lenders who are trying to manage their own losses and makes it harder to gauge which consumers are creditworthy. So when it comes time to sign the mortgage papers, some lenders are asking borrowers to commit to not seek forbearance.
Forbearance makes it a lot harder for some types of lenders to do business. When there are high rates of forbearance, like there are right now, just over 7%, it means that servicers have to continue advancing payments on mortgages to investors, the final holder of a mortgage, even if the borrower isn't paying.
Our reporter Orla McCaffrey will be here to talk about why lenders are doing this and get into all the details. That's after the break.
The CARES Act passed by Congress last spring let Americans harmed by the pandemic hold off on making months of mortgage payments. But some new homeowners are being asked at closing time to sign a form promising they won't seek forbearance. Our reporter Orla McCaffrey is here to explain. First off, Orla, are homeowners still applying for forbearance at the rate they were last spring?
They are not. The number of requests for forbearance has definitely gone down over the past couple of months.
How prevalent is mortgage forbearance now compared with early pandemic levels?
As more consumers' financial situations have stabilized somewhat, people have gotten back into work to a degree. But the share of loans in forbearance is still very high. It's about 7.2%, whereas pre-pandemic it was far below 1%.
So is this something new, lenders asking borrowers to commit to not seek forbearance?
Yes, this is new since the pandemic started, and it's really just a way for lenders to decrease risk, decrease the chance that somebody will ask for this and kind of just explain to borrowers why they might not be able to get a forbearance if they need one shortly after they get the loan.
Okay, so are lenders asking borrowers to commit to never asking for forbearance?
No, it doesn't go that far. They don't have to make a promise that they will never ask for forbearance on this loan. They just have to certify in some cases that they have no plans currently to ask for forbearance on this specific loan they're applying for. And sometimes if they have any other forbearance applications for other properties. But no, it's not a blanket promise that they can't apply for it. What the lenders are trying to avoid is having the mortgage fall into forbearance before the lender can sell it to a government agency or before it can be insured by a government agency. Because in that case, if the loan is in forbearance before the sale, then the lenders take a loss on the sale of either 5% or 7%, which in most cases will probably wipe out profit on the deal.
So that's something lenders are really trying to avoid like the plague.
Are borrowers being asked to promise they will never seek forbearance?
And how long does that usually take?
You know, it really varies. It can be a couple of days. It can take up to a couple of months for some loans. But I believe the average is eight to 10 days at this point. So the chances of it happening, of a borrower requesting forbearance and, you know, being granted it in that short time span, the chances of that are very low. But the fact that it's a possibility is what's making lenders extra cautious.
Are borrowers uneasy about committing to that?
I talked to one borrower and he said at first it kind of scared him because he interpreted it as never being able to apply for forbearance. So he kind of just had to do his due diligence and figure out that it was only a temporary restriction. From what I've heard from lenders, Most borrowers aren't refusing to sign the document because at that point in the process, you've already, you know, gotten the loan, done all of the stuff you have to do to buy a house.
Why do lenders worry about loans entering forbearance before they sell or insure them?
So, you know, in the lead up to closing, it's unlikely that this one thing is going to make you throw everything off the table.
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Chapters
7 chapters
1
What is the main topic discussed in this episode?
0:05–0:16
2
What change are lenders making at closing related to mortgage forbearance?
0:16–1:34
3
How prevalent is mortgage forbearance now compared with early pandemic levels?
1:34–3:09
4
Are borrowers being asked to promise they will never seek forbearance?
3:09–4:00
5
Why do lenders worry about loans entering forbearance before they sell or insure them?
4:00–5:33
6
How does forbearance affect lenders' business models and credit decisions?
5:33–7:22
7
What are the consequences for borrowers who sign these forms and later request forbearance?
7:22–7:27
Speakers
2 identifiedMore from WSJ Your Money Briefing
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