What is a Mortgage Forbearance Agreement
A mortgage forbearance agreement is an agreement made between a mortgage lender and 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 his or her payments.
The coronavirus outbreak has triggered forbearance help from Fannie Mae and Freddie Mac—which, between them guarantee more than two-thirds of all mortgage and 95% of mortgage backed securities.
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; it is designed for borrowers who have temporary financial problems caused by unforeseen problems such as temporary unemployment or health problems. 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 remedies other than a forbearance agreement.
A forbearance agreement may allow a borrower to avoid foreclosure until his or her 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 end of the forbearance period to accommodate the situation.
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, the borrower must show that he or she cannot make the current mortgage payments because of financial hardship, demonstrate that he or she 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.
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 provided to reduce or suspend payments for up to 12 months.
- Foreclosure sales and evictions suspended for 60 days—Freddie Mac lists the date as "at least May 17, 2020."
- Lenders must suspend reports to credit bureaus of past-due payments for borrowers in a forbearance plan
- No penalties or late fees for homeowners in a forbearance plan
- After forbearance, 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.