From March 1 through the end of May, Americans deferred debt payments on more than 100 million accounts, according to credit-reporting firm TransUnion, a sign of widespread financial distress. Millions are out of work, yet house prices are increasing in most markets. Why are forbearance agreements the leading driver of increasing house prices? What does a forbearance mean for your credit score and more importantly your ability to get new credit?
The Forbearance history due to Coronavirus
Forbearance is when your mortgage servicer or lender allows you to pause (suspend), or reduce your mortgage payments for a limited period of time while you regain your financial footing.
The CARES Act provides many homeowners with the right to have all mortgage payments completely paused for a period of time.
Under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, and guidance from federal agencies and the GSEs, there are two protections for homeowners with federally or GSE-backed (Fannie Mae or Freddie Mac) or funded mortgages:
- First, your lender or loan servicer may not foreclose on you until at least August 31, 2020. Specifically, the CARES Act and the guidance from the GSEs, the FHA, the VA, and the USDA, prohibit lenders and servicers from beginning a judicial or non-judicial foreclosure against you, or from finalizing a foreclosure judgment or sale. This protection began on March 18, 2020, and extends through at least August 31, 2020.
- Second, if you experience financial hardship due to the coronavirus pandemic, you have a right to request and obtain a forbearance for up to 180 days. You also have the right to request and obtain an extension for up to another 180 days (for a total of up to 360 days). You must contact your loan servicer to request this forbearance. There will be no additional fees, penalties or additional interest (beyond scheduled amounts) added to your account. You do not need to submit additional documentation to qualify other than your claim to have a pandemic-related financial hardship.
Credit card companies, auto lenders, and other lenders are providing similar relief to their clients via forbearance or modification plans. Over 100 million borrowers are in some type of forbearance on an account. Furthermore, 8.8% of U.S. mortgages are in forbearance. About 4.7 million mortgages are in forbearance, representing 8.8% of all home loans, Black Knight said in a Friday report.
No impact on credit score, but can’t get credit
The Cares act prohibits lenders from reporting the payments as missed payments and therefor loans put into Forbearance do not affect your credit score. Unfortunately what is happening in the marketplace is drastically different.
Banks have pulled back sharply on lending to U.S. consumers during the coronavirus crisis. One reason: They can’t tell who is creditworthy anymore. By early April, 33% of banks that responded to the Federal Reserve’s senior loan officer survey said they had increased their minimum credit-score requirements for credit cards over the previous three months, up from 14% in January. Bank respondents tightened lending standards for all consumer-loan categories tracked by the survey.
Furthermore, TransUnion recently began selling data to help lenders determine whether consumers have been affected by the pandemic, including data on people who have received a deferment or other assistance. According to the legislation, a forbearance can’t be used to deny credit to someone, but there are loopholes. For example, a lender in their underwriting might require the last 6 months of paystubs, mortgage statements, etc… and use this information to deny the borrower
Borrowers are stuck and can’t get credit
Nobody is publicly talking about it, but a forbearance is a red X mark for lenders and will prohibit, in many cases, any additional advance of credit. For example a bank is not going to give someone a new home loan if their existing mortgage is in forbearance. This is, in essence, keeping borrower’s stuck in their existing houses because without the ability to get a new loan, why would someone sell their existing house?
Why are house prices increasing?
4.7 million houses have essentially been taken off the market as the owners are financially stuck as they can’t get new credit. Furthermore 106 million borrowers are unable to do anything due to the red mark on their credit from the forbearance. Many of these borrowers might have deferred a credit card payment as opposed to their mortgage so the true number of homes off the market is exponentially greater than 4.7 million.
This drastically reduces inventory and will keep a large quantity of properties off the market for some time. The reduction in inventory in already tight markets will lead to price increases as demand has stayed relatively constant and supply has been constrained further.
What happens when the forbearances run out?
The next question is how many of the borrowers in forbearance will ultimately default? Nobody really knows, but if we assume that 40% end up defaulting after the forbearance runs out, this would amount to roughly 1.9 million in foreclosures, in 2008 3.1 million foreclosure filings were made. Even if 40% ultimately foreclosed, this is a very pessimistic number, it would not create a 2008 crisis with inventory. Furthermore, the majority of government subprime loans are at lower price points where there is ample market demand and ultimately absorption
Although a forbearance isn’t impacting a borrower’s credit score, it is making it impossible to get new credit as banks use other methods to deny credit to any borrowers in forbearance. 106 million people are essentially locked out of the financing market. This has led to a huge reduction in inventory that will not abate anytime soon. The large drop in inventory is stabilizing the housing market and leading to a v-shaped recovery with prices marching higher.
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Written by Glen Weinberg, COO/ VP Fairview Commercial Lending. Glen has been published as an expert in hard money lending, real estate valuation, financing, and various other real estate topics in Bloomberg, Businessweek ,the Colorado Real Estate Journal, National Association of Realtors Magazine, The Real Deal real estate news, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.
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