Will mortgage forbearance affect credit or loan qualification?

[James Carlson]

I have a number of investor clients here in Denver and Colorado Springs worried about coronavirus and their tenants' rent (and therefore worried about their mortgage payments). They're all asking me the same question: Will a mortgage forbearance either A) affect my credit score or B) impact my qualification for a loan in the future? 

I'm seeing mixed messages. I hear other agents advise clients to just dip into their reserves. Totally. That's what we're doing personally. But not everyone has those reserves, especially new investors who just bought. 

Here's what I'm finding. Any lenders out there? Institutional bankers? Thoughts?

Law firm advisories to banking institutions

A little context: in normal times, any loan modification is considered a "troubled debt restructuring," which is a negative on your credit score. I hear some lenders say that after this is all over, loan servicers will then list any forbearance period as a loan modification and that it will be seen negatively. 

But what I read in several advisories sent out by law firms that represent financial institutions indicate something else: 

Like this advisory from Thompson Coburn, that quotes a joint statement put out by all credit agencies (FDIC, etc.): "The agencies have confirmed with staff of the Financial Accounting Standards Board (FASB) that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief, are not troubled debt restructuring."

Other sources

I see the same message in many other law firm advisories (here, and here, for example) and in an FAQ put out this week by the FDIC.

Again, if you can pay, it might be smart to pay to avoid any risk of a hit to your future credit or lending ability. But it sure would be nice to know for our clients, in concrete terms, how a mortgage forbearance would affect them.

[Brett Goldsmith]

Yes forbearance plans likely will affect any ongoing refinances or financing. Right now they aren't reporting negatives for credit impact due to covid forbearance plans but I'm assuming they will get dinged when it ends and they don't catch up per repayment plan. 

[James Carlson]

@Brett Goldsmith

Thanks for the thought. Under the scenario you're talking about, I'd think it'd come down to whatever the agreement was. If the service provider is just tacking those -- for example -- three payments on to the end of the 30-year term, then would you be penalized right away?

[Brett Goldsmith]

@James Carlson It's not put at the end of the loan. It's just deferred and then you need to pay it back when the forbearance plan is up in a lump sum or jump into a repayment plan where you pay mortgage payment + arrears over a period of time ( increase in mtg payment ). I'm assuming if you transition extremely smoothly into a repayment plan that you may not get monthly lates...

Other option is to attempt a loan modification if you can't afford a repayment plan. That's where they put the arrears into the loan ( capitalization ) and bring you current and they may adjust the interest rate or maturity date, etc. 

[James Carlson]

@Brett Goldsmith

I don't know if that's true. I have a client who went ahead with a forbearance plan online with PennyMac. At the end, she got a note that said -- among other things -- "In no case will the full amount of missed payment be immediately due when your forbearance period ends."

[Brett Goldsmith]

@James Carlson I stated that it's either paid back in a lump sum or a borrower jumps into a repayment plan. It's in talks that some GSE's may defer the arrears. We will see what the government rolls out in time. 

[James Carlson]

Thanks for the insights, @Brett Goldsmith. I'll watch for more guidance in the coming days/weeks.

[Brett Goldsmith]

SEC. 4022. FORECLOSURE MORATORIUM AND CONSUMER RIGHT TO REQUEST FORBEARANCE.
(a) DEFINITIONS.—In this section:

(1) COVID–19 EMERGENCY.—The term ‘‘COVID–19 emergency’’ means the national emergency concerning the novel coronavirus disease (COVID–19) outbreak declared by the President on March 13, 2020 under the National Emergencies Act (50 U.S.C. 1601 et seq.).

(2) FEDERALLY BACKED MORTGAGE LOAN.—

The term ‘‘Federally backed mortgage loan’’ includes any loan which is secured by a first or subordinate lien on residential real property (including individual units of condominiums and cooperatives) designed principally for the occupancy of from 1- to 4- families that is—

(A) insured by the Federal Housing Administration under title II of the National

Housing Act (12 U.S.C. 1707 et seq.);

(B) insured under section 255 of the National Housing Act (12 U.S.C. 1715z–20);

(C) guaranteed under section 184 or 184A of the Housing and Community Development 3 Act of 1992 (12 U.S.C. 1715z–13a, 1715z– 4 13b);

(D) guaranteed or insured by the Department of Veterans Affairs;

(E) guaranteed or insured by the Department of Agriculture;

(F) made by the Department of Agriculture; or

(G) purchased or securitized by the Federal Home Loan Mortgage Corporation or the Federal National Mortgage Association.

(b) FORBEARANCE.—

(1) IN GENERAL.—During the covered period, a borrower with a Federally backed mortgage loan experiencing a financial hardship due, directly or indirectly, to the COVID–19 emergency may request forbearance on the Federally backed mortgage loan, regardless of delinquency status, by—

(A) submitting a request to the borrower’s servicer; and

(B) affirming that the borrower is experiencing a financial hardship during the COVID–19 emergency.

(2) DURATION OF FORBEARANCE.—Upon a request by a borrower for forbearance under paragraph (1), such forbearance shall be granted for up to 180 days, and shall be extended for an additional period of up to 180 days at the request of the borrower, provided that, at the borrower’s request, either the initial or extended period of forbearance may be shortened.

(3) ACCRUAL OF INTEREST OR FEES.—During a period of forbearance described in this subsection, no fees, penalties, or interest beyond the amounts scheduled or calculated as if the borrower made all contractual payments on time and in full under the terms of the mortgage contract, shall accrue on the borrower’s account.

(c) REQUIREMENTS FOR SERVICERS.—

(1) IN GENERAL.—Upon receiving a request for forbearance from a borrower under subsection (b), the servicer shall with no additional documentation required other than the borrower’s attestation to a financial hardship caused by the COVID–19 emergency and with no fees, penalties, or interest (beyond the amounts scheduled or calculated as if the borrower made all contractual payments on time and in full under the terms of the mortgage contract) charged to the borrower in connection with the forbearance, provide the forbearance for up to 180 days, which may be extended for an additional period of up to 180 days at the request of the borrower, provided that, the borrower’s request for an extension is made during the covered period, and, at the borrower’s request, either the initial or extended period of forbearance may be shortened.

(2) FORECLOSURE MORATORIUM.—Except with respect to a vacant or abandoned property, a servicer of a Federally backed mortgage loan may not initiate any judicial or non-judicial foreclosure process, move for a foreclosure judgment or order of sale, or execute a foreclosure-related eviction or foreclosure sale for not less than the 60-day period beginning on March 18, 2020.

[Caroline Gerardo]

It is appearing on some mortgage credit reports despite what Cares Acts says. It will be a hard stop to refinance or get a new purchase loan- will need to be current and out of forbearance before you get final approval