Although the shelter-in-place order continues to lighten and allow more economic activity, it’ll be a long time before things return to normal—if they ever do. For some lucky people, the shut-down simply meant working from home, but for others, it meant being fired, furloughed, or forced to stop work because of a coronavirus illness and thus, unable to pay the bills.
Understanding that it is better for everyone if homeowners can get back on their feet and make regular mortgage payments, the federal government enacted the Coronavirus Aid, Relief, and Economic Security (CARES) Act on March 27, which imposes a 60-day foreclosure moratorium starting March 18 for federally backed mortgage loans. A federally backed mortgage loan includes those insured by the Federal Housing Administration (FHA), the Department of Veterans Affairs, or the Department of Agriculture, as well as those purchased or securitized by Fannie Mae or Freddie Mac.
In addition to the federal protection, Governor Gavin Newsom issued Executive Order N-28-20 authorizing local governments to stop judicial foreclosures through May 31, while many state banks and private mortgage lenders agreed not to initiate foreclosure sales for at least 60 days. Be aware, the majority of foreclosures in California are non-judicial will have a limited impact.
So, what does all this mean? It means some mortgage lenders are allowing homeowners affected by the pandemic to skip mortgage payments; this forbearance period varies, but most are between six months and a year. The question is, what happens when that period ends?
In late April, Fannie Mae and Freddie Mac, announced that borrowers who took advantage of programs that allowed skipped mortgage payments during the coronavirus wouldn’t be forced to make lump-sum payments as soon as the forbearance period ended. They recognize that just because the economy is sputtering to life again, people cannot instantly come up with enough to pay several months’ worth of mortgage payments.
Fannie Mae and Freddie Mac are government-sponsored enterprises that buy mortgages from lenders and either hold these mortgages or package the loans into mortgage-backed securities to sell. Fannie Mae and Freddie Mac are important because they provide liquidity for thousands of banks, savings and loans, and mortgage companies that make loans to finance housing. This is why Fannie Mae and Freddie Mac can dictate the terms of so many mortgages nationwide.
At this point, it appears that if you skip payments in accordance with your lender’s forbearance program, you will not be punished with late fees or a nasty report to the credit bureau which would lower your credit rating, nor will you get a notice announcing that your lender is foreclosing on you, but there’s some fine print that goes with each program, and it’s important to know where your particular lender is drawing the line.
Also, no matter how generous the forbearance program is, you’ll still be accruing interest on the unpaid principal, and that adds up over time. If you skip payments for one year on a mortgage with a 15-year term, it’ll take two years to repay it, because you’re paying interest on a higher balance for a longer period of time. Long story short, if you can afford to pay your mortgage, you should pay it, because even the best-case scenario for repayment is expensive.
Obviously, you should take advantage of these programs rather than lose your home, so don’t stick your head in the sand and pretend it isn’t happening. Call your lender before they call you. I believe the vast majority of institutional lenders are willing to work with borrowers who are willing to work with them. In the end, it is better for the lender to be flexible than to go through the expensive and time-consuming process of foreclosing on you. Help them help you by keeping them up to date on your financial situation.
If you have questions about property management or real estate, please contact me at rselzer@selzerrealty.com or call (707) 462-4000. If you have an idea for a future column, share it with me and if I use it, I’ll send you a $25 gift certificate to Schat’s Bakery.
Dick Selzer is a real estate broker who has been in the business for more than 40 years.