Millions of borrowers may be unable to pay their mortgages as the coronavirus continues to crush the U.S. economy. But there is a government back-up plan. The CARES Act just signed into law allows borrowers to skip payments for up to a year and then have those payments tacked on to the end of their loans.
There’s one hitch: the $2 trillion stimulus package states that borrowers need not provide any proof of financial hardship. They can simply say they can’t pay.
In an interview Wednesday, the chief regulator of mortgage giants Fannie Mae and Freddie Mac, FHFA Director Mark Calabria, begged borrowers to be honest.
“We’re operating on the honor system. We are asking and we’re putting together a script for servicers. This is supposed to be limited to if you’ve lost your job, you’ve lost income. Please, if you haven’t lost your job, continue paying. If you can pay your mortgage please do so because we really need to focus on the people who can’t.”
There will be some accountability: borrowers will have to provide documentation when they set up their repayment plans. Lying then would be considered fraud, a spokesperson for the FHFA said.
Calabria estimated that up to 2 million borrowers could be applying for loan forbearance by May and said that mortgage servicers, as well as Fannie and Freddie, could handle that if it was just for a few months. After that, there could be problems.
“If this goes beyond two or three months and we start to get worse than that, then that’s going to be a lot of strain, and certainly we’re going to start to see some firms get into a lot of liquidity trouble,” he added.
While the mortgage market was much healthier going into this crisis than it was going into the subprime mortgage crisis, there is still one very vulnerable area: FHA loans. These are low down payment loans to borrowers with lower credit scores, and they are insured by the federal government.
“The truth is that subprime really didn’t as much go away as it went into FHA, so you have a lot of FHA borrowers who I think are vulnerable. The real question is the duration of this,” Calabria said.
“If this is something that goes on for six months or more, then I think you’re going to continue to see a lot of stress, and I would really emphasize the place to look right now is the FHA market, with the credit quality of their borrowers,” he said. “They’re really going to be the first canary in the coal mine in terms of what the broader implications are going to be.”
Wow. Seems to me this will almost certainly be abused. And how will it influence the real estate price cycle?
how will it influence the real estate price cycle?
It should keep it levitating! 🙂
The thought that unemployed people will need to sell their home to access money needs to include the fact that those homeowners still need to live somewhere. Who feels like packing up everything and putting it in storage and go live in a hotel to wait this thing out? While your now-accessed equity just sits in the bank?
People don’t need all their equity – they just need $10,000 to $50,000 to get through this. Reverse mortgages or hard-money loans will do the trick.
Wow. So as long as people are aware of this option, there should be zero panic sales and zero foreclosures for the next 12 months. It is free rent for homeowners, no? Abuse will run rampant, so I have to believe they must put some verification of loss of job/income – ‘honor system’ might have worked in the 50’s, but come on.
It is free rent for homeowners, no?
It sounds like it to me, and this is on top of the California Homeowners’ Bill of Rights.
Between the free rent and mandatory loan mods, there won’t be any foreclosures.
It’s not free. It gets tacked on to back of loan. It generates more interest and increases the payoff by more than a year. It’s akin to a 31 year mortgage.
No one in their right mind who can afford to keep paying should “take advantage” of this. It isn’t in their best financial interest. It only makes sense for those who NEED it.