Guest post by Warren Goldberg

The Potential Unintended Consequences of a Blanket 12-Month Moratorium (Forbearance) on Mortgage Payments, Due to Economic Hardship Caused by Coronavirus!

There is no question that a great many Americans are being economically damaged, in a big way, by the government mandated shutdown of the U.S. economy due to pandemic.

And yet, we can observe just how necessary the shutdown has been in terms of public health.

Economic Shutdown – A Necessary Evil

This decision to put the U.S. economy on pause has inflicted a great deal of downside to the financial well being of Americans, with the timing and methodology of an ultimate decision to let people go back to work no easier to make.

Over $2 trillion in federal financial assistance has been announced and applied for through PPP and EIDL, and by individual employees through unemployment insurance to name a few of the programs available for financial assistance. In addition, states have imposed restrictions on some of the more punitive penalties that individuals and businesses could be facing, through actions such as New York’s eviction moratorium.

Under the CARES Act, student and mortgage loan borrowers will be receiving a potentially significant amount of help too.

All of which brings us to mortgage loan forbearance, the subject of the article below written by Warren Goldberg, President of Mortgage Wealth Advisors.

There are, of course, potential unintended consequences through government decisions made that initially sound critical, generous and necessary. And while they may very well be all three, there will always issues that may arise that are either not thought of, or not considered particularly important at the time.

The Mortgage Market Improves, But the War Rages On by Warren Goldberg

The Federal Reserve’s continued buying of Mortgage-Backed Securities has resulted in stability returning to the secondary markets.However, mortgage borrowers, lenders, and investors alike must realize that the market has not yet been cured. This is only the very beginning of the end.

Under the recent CARES Act, homeowners now have the ability to request a payment moratorium for up to 12 months due to a coronavirus-related hardship. However, unlike similar options offered during the 2008 recession, homeowners are NOT required to demonstrate a financial hardship and their mortgage companies are NOT allowed to ask for proof! The request by the homeowner is all that’s needed!  Didn’t politicians foresee the vast opportunity for abuse when they wrote this law?? 

There is a tremendous downside to homeowners thinking they’re somehow getting free money. (Read last week’s article for the pros and cons.) Plus, in these precarious times, a large percentage of homeowners requesting forbearance could cause many mortgage companies and the agencies to run out of cash. The secondary market buyers of these loans such as Fannie and Freddie will not purchase loans in forbearance. Lenders unable to move these loans off of their credit lines may lack liquidity going forward which means they will be unable to write new loans. Adding insult to injury, lenders are still responsible for the performance of loans already sold to investors over the past year or two. If these loans default or go into forbearance, the financial penalties to lenders could be severe.

As explained in my prior articles, mortgage servicers are still responsible for making payments to the investor holding your mortgage, whether you are making payments or not. This too threatens to cripple the mortgage industry.

BOTTOM LINE: If you do not need a mortgage forbearance, DON’T DO IT. The damage you cause is not just to yourself.You could be contributing to a crisis that pushes your bank out of business.

With low “base rates” creating risk for premature refinances (refinances on loans less than two or three years old) and the CARES Act irresponsibly creating cash flow risks for lenders and investors alike, investors are unwilling to pay premiums on mortgages.The immediate result is that zero-point mortgages across the industry have become difficult to deliver to borrowers in all but the cleanest and most attractive scenarios. Since 2007, the mortgage industry has dealt with “Risk-Based Price Adjustments” for higher Loan-To-Values, less than perfect credit scores, property types, high-balance loan amounts, etc.For years these adjustments could be paid as points or built into the borrower’s mortgage rate. No longer.

BOTTOM LINE: While these issues are causing pain for borrowers and the industry alike, This Too Shall Pass. The industry is adjusting and evolving to deal with this crisis. These are NOT permanent solutions to a temporary crisis.

It’s been a difficult few weeks for us all. Many Americans are feeling scared and powerless.W e’re all human and it’s OK to feel these emotions.  However, it’s what we do after feeling these emotions that proves our mettle. Whether a first responder, a doctor, nurse, small business owner, teacher, or parent, we must all demonstrate the fortitude, determination, and strength of character to lead others through this crisis, heal the sick, comfort our children and each other, and reboot the economy as quickly as possible. 

We are dealing with a global crisis, the likes of which we’ve never seen before. Yet we have encountered adversity before and we HAVE prevailed. We’ve survived a Great Depression, two world wars, natural disasters, terrorist attacks, and The Great Recession. We survived and became stronger.  Here too we shall prevail. When we unite to fight a common enemy, America cannot be defeated.