Understanding Mortgage Deferral Plans

Understanding Mortgage Deferral Plans

By Emily Hayes

Nearly one of every five Americans are currently out of work. These are unemployment numbers the U.S. hasn’t seen since the Great Depression in the 1930s. In this time of crisis, the basics, like food and shelter, are high on everyone’s list. If you are one of the unfortunate people who have lost a job or been furloughed — and are also a homeowner with a mortgage — you may be struggling to pay that mortgage. Dion Rabouin (@DionRabouin) reports, “Many Americans don't know about mortgage deferral plans.”[1] That’s a problem. He notes, “The total number of home loans now in forbearance increased to 8.36%, according to the latest report from the Mortgage Bankers Association, and that number could be higher but many Americans aren't aware they have the option. … Fannie Mae's latest national housing survey finds that only half of the mortgage holders and just a third of renters know about relief programs, including the forbearance program now available because of the CARES Act.”

What are forbearance and deferment?

Theo Thimou notes, “Both forbearance and deferment can help you press pause on payments to creditors when you’re financially struggling. But there are some differences between the two.”[2]

Deferment: Deferment is basically coming to an agreement with your creditor to freeze payments for a period of time. The money you don’t fork out during the payment holiday is then added to the end of your loan.”[2] In other words, the life of your loan is extended by the number of months you defer payments. Remember, you just can’t stop paying and assume your mortgage holder will understand you are deferring your payments not defaulting on your loan. You must work out an agreement with your mortgage holder. This is important, because, as Thimou explains, “Additional interest and fees don’t accrue during the payment holiday, according to Experian.”

Forbearance: According to Thimou, “Forbearance is an agreement you come to with your lender where the lender agrees to accept reduced payments or no payments at all for a certain period of time. When that period ends, the borrower restarts with regularly scheduled payments. You must also pay the amount you didn’t pay during your payment holiday.” Here’s the rub: Your lender could require you to repay all back-owed mortgage payments in a lump sum at the end of the forbearance period (aka a balloon payment). If you didn’t have the money to pay during the crisis, you are unlikely to have that money to make a catch-up payment when the crisis ends. Don’t let the details of an agreement with your lender unexpectedly bite you down the road. If you enter into a forbearance agreement, make sure you can make back-up payments using an installment plan. Thimou reports, “According to Experian, you can either do that as a lump sum or in monthly installments over 12 months. If you choose the latter option, the ‘catch up’ payments are in addition to your regular monthly payment. Unlike deferment, a forbearance involves the possibility of interest and fees being tacked on deferment period.”

Obviously, a deferment plan is better for you than a forbearance plan. Jacob Passy (@jepassy) reports, “More than 3.5 million mortgage borrowers have requested forbearance.” However, he warns, “They need to weigh their options carefully.”[3] He adds, “Calling your lender and requesting forbearance is just the first step in the process. … Borrowers need to be careful that they don’t agree to a repayment plan they cannot afford.”

Concluding thoughts

Remember, neither deferment nor forbearance means loan forgiveness. Passy notes, “For those who are still facing financial trouble at the end of forbearance, they can reach out to their mortgage lender to request a loan modification. This would reduce the monthly payment amount for the loan.” Of course, your mortgage lender doesn’t have to modify the loan; however, loan modification is better for them than loan default. Nevertheless, negotiations can get tricky because loan servicers may not be the loan owners. Home loans are often sold to investors and those investors might be difficult to reach. Andrea Bopp Stark, an attorney with the National Consumer Law Center, explains, “Knowing who the owner of the loan is will provide the borrower with information to research what options are available from that entity. Servicers must respond to these requests within 10 days. If the servicer does not respond, the borrower should send another letter and seek legal assistance. The servicer could be held liable for actual damages and up to $2,000 in statutory damages for a failure to respond.”[4] The bottom line is homeowners with mortgages have some options if they are experiencing financial difficulties. The more knowledgeable you are about your options the better off you will be.

Footnotes

[1] Dion Rabouin, “Many Americans don’t know about mortgage deferral plans,” Axios, 28 May 2020.

[2] Theo Thimou, “Forbearance vs. Deferment: What’s the Difference?” Clark, 17 April 2020.

[3] Jacob Passy, “If you’re skipping your mortgage payments, watch out for this costly mistake,” MarketWatch, 3 May 2020.

[4] Ibid.