What Is a Mortgage Forbearance Agreement?
A mortgage forbearance agreement is an agreement made between a mortgage lender and a delinquent borrower in which the lender agrees not to exercise its legal right to foreclose on a mortgage and the borrower agrees to a mortgage plan that will—over a certain time period—bring the borrower current on their payments.
The coronavirus outbreak has triggered forbearance help from Fannie Mae and Freddie Mac, which, between them, guarantee more than two-thirds of all mortgages and 95% of mortgage-backed securities.
- A mortgage forbearance agreement is a plan made between a lender and a borrower who is struggling to make mortgage payments that attempts to allow the borrower to fulfill the mortgage obligation and avoid foreclosure.
- The agreement generally reduces or entirely suspends mortgage payments for a set time period during which the lender agrees not to foreclose on the property.
- It is intended for borrowers with temporary financial problems and is not considered a long-term solution.
- In some cases a lender may agree to extend a mortgage forbearance agreement beyond its initial end date.
When Borrowers Have Trouble Paying
A mortgage forbearance agreement is made when a borrower has a difficult time meeting his or her payments. With the agreement, the lender agrees to reduce or even suspend mortgage payments for a certain period of time and agrees not to initiate a foreclosure during the forbearance period. The borrower must resume the full payment at the end of the period, plus pay an additional amount to get current on the missed payments, including principal, interest, taxes, and insurance. The terms of the agreement will vary among lenders and situations.
A mortgage forbearance agreement is not a long-term solution for delinquent borrowers. Rather, it is designed for borrowers who have temporary financial problems caused by unforeseen problems, such as temporary unemployment or health issues. Borrowers with more-fundamental financial problems––such as having chosen an adjustable-rate mortgage on which the interest rate has reset to a level that makes the monthly payments unaffordable––must usually seek other remedies.
A forbearance agreement may allow a borrower to avoid foreclosure until their financial situation gets better. In some cases the lender may be able to extend the forbearance period if the borrower’s hardship is not resolved by the original agreed-upon end date.
A loan modification is meant to be a permanent solution to unaffordable monthly mortgage payments through renegotiation of the mortgage terms rather than the temporary suspension or reduction of payments.
Mortgage Forbearance Agreements vs. Loan Modifications
While a mortgage forbearance agreement provides short-term relief for borrowers, a loan modification agreement is a permanent solution to unaffordable monthly payments. With a loan modification, the lender can work with the borrower to do a few things (such as reduce the interest rate, convert from a variable interest rate to a fixed interest rate, or extend the length of the loan term) to reduce the borrower’s monthly payments.
In order to be eligible for a loan modification, borrowers must show that they cannot make the current mortgage payments because of financial hardship, demonstrate that they can afford the new payment amount by completing a trial period, and provide all required documentation to the lender. The documentation the lender requires could include a financial statement, proof of income, tax returns, bank statements, and a hardship statement.
Both Fannie Mae and Freddie Mac have instituted a number of emergency measures designed to help homeowners dealing with the repercussions of the coronavirus pandemic.
Fannie and Freddie released essentially identical sets of guidelines for borrowers and lenders about single-family mortgages:
- Homeowners “adversely impacted by this emergency,” in the words of Fannie Mae, “may request mortgage assistance by contacting their mortgage servicer.”
- Mortgage forbearance will be provided to reduce or suspend payments for up to 12 months.
- Foreclosure sales and evictions are suspended until at least August 31, 2020, according to June 17, 2020 guidance from FHFA.
- Lenders must suspend reports to credit bureaus of past-due payments for borrowers in a forbearance plan.
- There will be no penalties or late fees for homeowners in a forbearance plan.
- After forbearance, the lender is mandated to “work with the borrower on a permanent plan to help maintain or reduce monthly payment amounts as necessary, including a loan modification,” states Fannie Mae. Freddie Mac is “offering loan modification options to provide mortgage payment relief or keep those payments the same after the forbearance period.”
- Beginning July 1, 2020, Freddie Mac is “offering a payment deferral solution in which your deferred payments will be due at the end of the loan.” Fannie Mae promises that “following your forbearance, you are not required to repay missed payments all at once, but you have that option.”