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No Lump Sum Payments at the End of COVID Mortgage Forbearances for Federally-Backed Loans
(The following is for informational purposes only. It is not legal advice. If you want to discuss your personal situation, please make an appointment with me at 561-214-6163 or email me at Malcolm@MEHRealProperty.com)
I’m going to be a little bit more technical than usual today, folks, but I’m asking you to hang in there with me because this information is important — if not for you then surely for someone that you know.
The CARES Act permits homeowners with a federally backed mortgage loan (e.g., loans backed by Fannie Mae or Freddie Mac, or owned, insured, or guaranteed by FHA, VA, or USDA) who are experiencing a financial hardship due to COVID-19 to request a mortgage forbearance – a “time off” from paying their mortgages. As of April 30, nearly 4 million people, or just over 7% of mortgage holders, have stopped making their payments. That’s an increase of 2,400% since March!!
The CARES Act is very clear: If a homeowner with a federally-backed loan asks for a forbearance and affirms that he/she is experiencing a financial hardship because of the COVID-19 emergency, then the bank has to give that person a 180-day forbearance. At the end of the first 180 days, the borrower can ask for another 180-day period and the Bank MUST give it.
What hasn’t been clear, though, is what happens after the forbearance period is over? We have heard from clients and directly from banks that lenders want the missed payments to be paid in a lump sum. That makes absolutely no sense! 30 million people are unemployed and the economy is tanking. How are people supposed to come up with all the missed payments at once? If I had any hair, I would be pulling it out.
Fortunately, the government has heard about this issue and forced the banks with federally-backed loans to change their policy.
On April 27, the Federal Housing Finance Agency announced that borrowers who have loans that are backed by Fannie Mae or Freddie Mac are not required to repay missed payments in a lump sum. At the end of the crisis, the banks will work with the borrowers to (a) set up a repayment plan; (b) modify the loan so that the missed payments are added to the end of the mortgage; or (c) set up a loan modification that reduces the borrower’s monthly mortgage payment.
Likewise, for FHA loans no lump sum repayment for the missed payments will be required at the end of the COVID-19 forbearance period. The options for FHA loans, though, are even better than for Fannie and Freddie. If you were current on your loan or not past due more than 30 days as of March 1, 2020 you could get a COVID-19 Stand Alone Partial Claim. A partial claim is a no interest, junior loan secured by your property. No payments are due on the COVID-19 Standalone Partial Claim until (a) the end of your loan; (b) the sale or refinancing of your home; or (3) the termination of FHA insurance on your mortgage. This is a great option because FHA borrowers don’t have to pay back any of the missed payments until the end of the loan or their mortgage insurance. If you are not eligible for the COVID-19 Standalone Partial Claim, your bank will evaluate you with FHA’s other loss mitigation tools to help you repay the balance owed over time.
This is good news, but only for the roughly one half of homeowners with federally-backed loans. If your loan is not backed by the government, these rules don’t apply. So make sure that your loan is covered by the government. In one of my previous newsletters, I sent the links to Fannie and Freddie’s loan lookup sites. If you can’t find that newsletter, email me and I will have my assistant send you another copy.
I hope this helped. Good luck everyone. Stay safe.