What is a forbearance and how does it actually affect your credit?

Maryann Little from Short Sale Mitigation speaks with Mortgage Loan officer Patrick Queally and gets some down dirty answers on Forbearance.

how forbearance affect your creditPatrick: We talked about it from a big picture from an industry standpoint though let’s talk about what the forbearance plans mean for consumers and I’m going to use real simple math.

Maryann: Let’s say you know let’s say I can’t make my mortgage payment. I realize right now I can’t make my mortgage payment what’s the first step what should I be doing?

Patrick: Well let’s define what forbearance is first and then come back and tell you what steps you should take. Unfortunately, the mass media has put out a narrative that isn’t necessarily a hundred percent true. They’re not lying to anybody but you’re not getting the full story. Let me explain that I think this is the post I made on Facebook that caught much attention that you chimed in on as well which is why we’re having this conversation today.

Maryann: I got from that post forbearance is not your friend like that’s kind of the mantra that stated in my head.

Patrick: I think the title or the headline was forbearance is not forgiveness. The Cares Act was put out that basically encouraged all loan servicers to allow homeowners to go into forbearance without any financial means test. You don’t have to demonstrate any hardship you just going to raise your hand and say hey I’d like a forbearance. Consumers are being given forbearance without really understanding what that means. Now that’s a partially false narrative that the media is putting out there basically goes like this, it says hey, apply for forbearance if you’re given a 3-month forbearance they’ll just tack those three months on to the end of the note. No problem. You basically skip three months’ worth of payments.

Maryann: And that’s what’s happening now, correct?

Patrick: That was true. I’d love to sign up for that too. But it’s simply not true. You can skip months with the payments, you sign me up. He’s up by two houses, you know. So really when you go into forbearance and we have letters from, I’ve colleagues all over the country and we a mastermind and network and talk about different ways to help our clients, we’ve put together a bunch of different screenshots from different forbearance agreements that are offered by various lenders. Here’s how it works, this is the month of April, let’s say, you request forbearance and the loan servicer grants you forbearance for three months. So, you don’t have to make the April, May, or June payment. You’re in forbearance for those three months. Come July 1, you’re no longer in forbearance. Make the July payment. What most consumers don’t understand is the forbearance agreement says, when you come out of forbearance and make that July payment you also now have to pay the April, May, and June. Basically, you’re paying four months’ worth of payments. You skip three months but then you make four payments as one lump sum.

Maryann: It makes no sense.

Patrick: If you can’t afford to make the payment for three months, how are you going to make four payments at once? Here’s where we come to a fork in the road and I’m going to play devil’s advocate here and play out both best- and worst-case scenarios. So, worst-case scenario first. Worst case scenario, you get that bill and it shows, well now you have to make four months’ worth of payments. The vast majority of reactions going to be, I can’t do that. Get on the phone with the loan servicer and a couple of things could happen. It could be a loan mod, and by the way, none of this is written in stone. So, all the loan servicer is basically saying, go in forbearance and we’ll figure it out later. How the hell are you going to sign a contract if this does we’ll figure it out later?

Maryann: That’s one thing I’ve been saying to people, is listen whatever you’re being told get it in writing but maybe they can’t get it in writing.

Patrick: Exactly. When a forbearance payment comes due that the lump sum payment is due, the consumer can’t pay it. Get on the phone with the loan servicer possible outcomes that I see happening maybe they will defer it and take that three- or four months’ worth of payments and just tack it on to the end. Now your 30-year note becomes 30 years and six months, maybe similar to an escrow shortage. If you’re paying a mortgage collecting money for taxes insurance, your tax bill goes up, you happen paying enough in to pay the tax bill, well you have to make that up somehow the loan servicer spreads it out over time. That may be the same thing with the deferred payments. You’ve got $6,000 worth of deferred dollars let’s spread that out over six months so your payment is higher by a thousand dollars for six months until you get paid and caught up. Maybe that’s reasonable, maybe it’s not I don’t know.

Maryann: It might be reasonable if at the end of it

Patrick: You can get back to work
Maryann: Yeah and you’re back to work at the exact same position that you were before and I don’t think that’s going to happen. I think there are some businesses that have permanently folded.

Patrick: Similar to the last time around, I think what the net result is going to be in a lot of cases is a modification.

Maryann: They do the forbearance and then they realize in the fourth month they cannot make the three payments plus that fourth. Your suggestion is then to call the servicer and say I need

Patrick: No.

Maryann: Ok what’s your suggestion?

Patrick: My suggestion is don’t go into forbearance in the first place. Forbearance is a horrible idea. I would rate forbearance one step above bankruptcy. I’m not saying bankruptcy, I mean it’s the appropriate step for someone who really needs it.

Maryann: So, what about modification? Should they call and ask for a modification immediately?

Patrick: I don’t think that any lender is going to proactively offer a modification. I think going to put the default fallback position for the loan servicer is forbearance right now.

Maryann: Tell me how this impacts people’s credit?

Patrick: That’s exactly where I’m going.

Maryann: I thought something came out where they said, oh you can do the forbearance and it’s not going to impact your credit and now I see that’s wrong.

Patrick: Half-truth. The whole Cares Act again contrasts the last time around. The Fed stepped in quickly put the Cares Act together to try to help the industry as well as consumers but there is a whole slew of unintended consequences. It’s really you know, peeling back the onion. So let’s peel back another layer. Let me give you an example best-case scenario. Let’s say the consumer goes into forbearance for three months and in month two or a month three they actually do get back to work now they have the income. That forbearance lump sum comes due in month four they actually have the financial capacity to make that payment. Yeah sounds great. They pay that lump sum they’re right back on track. Great. What happens in that case person’s back to work. Maryann, again we’ll use you as an example. Your back to work congratulations and we see mortgage interest rates that are still at near all-time lows or even lower your recordset. And Maryann says well hey, this is a great time to refinance I’m back on track, I’m making my payments, I can save two three five hundred bucks a month If I refile, let’s do it. So, Maryann calls me. We get all the income documents, we take a look at a credit report, wait a minute Maryann, for April May and June you didn’t make a mortgage payment. Well as part of mortgage qualifying, we have to prove you made your payment on time for the past twelve months. Now maybe the mortgage servicer didn’t mark you as being late but when we’re looking at that report we can see no payment was made for those three months. So, you weren’t necessarily marking late but because you didn’t make a payment, we can’t show you made 12 months payments on time because you didn’t, you don’t qualify to refinance. You won’t qualify until you’ve made 12 months’ worth of payments.

Maryann: So, that’s a lot for homeowners, I think.

Patrick: Yeah. Let me flip back again to the worst-case scenario. So, you hit the end of forbearance, you can’t make that payment, you can’t pay that lump sum. So, the Cares Act encourages, not requires, because I’ve seen loan servicers already marking people as being late even though they’re in a forbearance agreement. So, the loan servicer can still mark you as being late but let’s say, through the forbearance, the loan servicer does not mark you as being late and at the end of forbearance, well you can’t pay that lump sum. So, you’re late for April, May, and June and now you can’t pay the lump sum for July. That’s four months’ worth of late payments. Maryann, what happens when you haven’t made a mortgage payment for four months?

Maryann: I can’t get a mortgage.

Patrick: You will get apparently a notice of default. That loan servicer has the ability to mark you too late for April, May, and June and if you didn’t make July, July as well. Then apparently, they can file a notice of foreclosure.

Maryann: Isn’t it three months and then isn’t there a clause in most mortgages they can call the note do.

Patrick: That’s exactly what I’m saying.

Maryann: Accelerate the mortgage.

Patrick: That’s exactly what I’m saying. So, you haven’t paid for April, May and June or July. So, there are two things that can happen here. The loan servicer could mark you as being late and now all sorts of penalties on top of that and they could file a notice with default at the courthouse which is basically a foreclosure notice. Now, what happens in terms of your credit. Let’s say they don’t take that extra step, they don’t actually file anything at the courthouse. You come to some sort of modification, some sort of workout agreement and then you come to see me again once you’re back and you’re gainfully employed, you think you’ve righted the ship, everything’s cool, you come back and see me. Oh, you’ve got four months’ worth of a ruling late. You didn’t pay for April, May, June, or July. Technically that’s a notice of default. Technically according to Fannie Mae and Freddie Mac underwriting guidelines, you don’t qualify for mortgage financing for the next seven years.

Maryann: Wow

Patrick: How’s that for a kick in the teeth? So, again forbearance is not your friend. Forbearance is not forgiveness. The clinical definition of forbearance is it’s a postponement of payment, not forgiveness. So, as a consumer, you really got to figure out when is it postponed until and how do you catch up on that postponement. Is it a one-time lump-sum payment? Is it like the media narrative? Is it just tacked on to the end of the note? Is it going to be small increments paid-up overtime?

Maryann: I’m sorry I don’t need to interrupt Patrick. If it was tacked on to the end of the note and correct me if I’m wrong, wouldn’t that be more, is it that a modification of the loan, more of a modification?
Patrick: Technically, yes. So, a forbearance in and of itself falls under the umbrella of modification you’re altering the terms of the original contract of the original note. Every time you alter those conditions you know, repayment terms, times, or amounts of repayment technically yes, that’s what the modification of the note.

Maryann: Let’s say when I go into this, so before I miss a payment. It’s April and I miss April. Let’s say, it’s the beginning of April, it’s April 1st. I know I’m going to miss the payment. What happens and when will it impact my credit and how? So, April 15th, doesn’t something happen? Doesn’t it something happen on April 16th? So, I go into a different loan category? Some kind of mark?

Patrick: Not necessarily. In the U.S. the mortgage where the mortgage industry has created before residential transactions is that that mortgage payment is due on the 1st of the month. You have up until the 15th, before the servicer to receive the payment without any financial penalties to you. So, as the consumer as long as you send that payment and as long as the loan servicer receives it on or before the 15th, you’re good. If they receive it on the 16th or after there is a penalty which is equal to 3% of the principal and interest amount. Now if you pay on the 17th or 18th or 20th as long as you’re paying that 3% penalty, you’re good. Now if the payment goes rolls into the first of the following month and they still haven’t received payment, that’s when they can report to the credit bureaus as being a mortgage late.

Maryann: If you’re one month late what happens? Like, what if I have a 750-credit score what’s going to happen on that the 31st day or the first day of the next month?

Patrick: A lot of times it takes, there’s a lag time from when you take an action whether to make a payment or not make a payment. From when that’s actually going to appear in a credit report it could be anywhere from 30 to 90 days. If you missed an April payment, I might not necessarily know about it until you know June or July if we’re pulling a credit report at that point. But having a recent mortgage late, unfortunately, the credit bureaus their credit scoring algorithm is proprietary you don’t know. You know, I can’t tell if you miss it it’s going to have exactly you know 100-point difference in your score but you know, speaking from knowledge in the industry, yeah, your score is going to tank probably a hundred points or more.

Maryann: Or just a one month or all three months?
Patrick: If you have three months, you’re in hundreds s with an s, hundreds of one’s difference. You know it really depends on what everything else that’s going on in your credit report as well. Obviously, in the mortgage industry, we’re more focused on the mortgage payment history and the mortgage credit report we get. That’s another sort of misconception in you know, credit industry as a whole mortgage credit reports are different than consumer credit reports for credit cards or things like that. And that’s also different from my credit report used for auto loans. So, there are different types of credit reports and those different types of reports have different scoring ranges and there’s the different weight placed on different types of accounts.

Maryann: All right. So, that brings me to you know, you’re in forbearance let’s say you can’t make your payment’s, you’re in your fourth month and maybe you try for a loan modification let’s say you get rejected what should people proactively be trying to do at this point?

Patrick: Great question. And there’s a lot of unknowns, I mean we don’t know how these forbearance plans are going to play out in the future. Everything I’m talking about is you know, some of it is fact that has already happened and a lot of it is my prediction as to what’s going to happen in the future, based on what I saw in the last cycle. So, what’s going to happen if you’re coming out of forbearance and you still can’t make the payment, well again you shouldn’t be going into forbearance unless that’s sort of your last resort. So please if you’re currently employed, if you’re working from home, still getting a paycheck, don’t think it’s free money, don’t think you just get to you know, skip a payment, keep current on your payments. A forbearance is an option really for people that truly have some sort of financial hardship. Anybody can get it right now, not everybody should. If you’ve got a three-month forbearance or a six-month forbearance coming up to the end of that you’re still not in any better financial condition, well before that’s over you got to proactively reach out to that loan servicer contact them and say hey things are still not great I come out of forbearance, I’m still going to be in a tough spot, can we extend the forbearance? Now, written into the Cares Act we’ve been using the example of three months, in the Cares Act, it is actually six months. When you apply for forbearance you get a six-month forbearance, but there’s also an option to extend that for an additional six months. You actually could go the way the legislation is currently written, you could go up to a year with forbearance payments.

Maryann: And yet the more I’m listening to you talk, like I would obviously, you wouldn’t suggest anybody you go beyond the three months. Like if you can do that three months, and you can’t pay that fourth, get out.

Patrick: Exactly. Even though it’s possible it’s not recommended and again I’m putting the forbearance basically one choice better than bankruptcy. I’m not knocking bankruptcy for people that need it that’s a financial mechanism to help them. But forbearance is not just something you decide to do on a whim and say oh this is easy, no it has a long deep-reaching financial impact. Now another anecdote for you, there are some loan servicers now that are just having sweeping changes and giving forbearance to people that really didn’t even ask for it believe it or not. The post that I made on Facebook which again led to this conversation, I had a client that saw that who contact, before he saw the post contacted his loan servicer just to ask questions, just to figure out what does this forbearance thing mean. He was on his account online, scrolling through, he doesn’t remember doing it but apparently, he must have clicked on something to request a forbearance. They canceled the Direct Debit payment out of his account. Now, this is April what seven eight nine? More than a week past the first of the month where the payment should have been taken out after he saw my post he went back and looked at his accounts and saw that his loan servicer had actually put him into forbearance and had not taken the payment out for that month. Now he was able to jump in and rectify that and terminate you know, being in forbearance to make sure he’s paid on time because you know, he wants to be able to buy another house or to refinance something in the future. He doesn’t want this and he’s still gainfully employed. He didn’t need it, he wasn’t even asking for it. They gave it to him. I don’t want to see its loan servicers playing dirty here but I think what happened last time around once the dust settled there are quite a number of loan servicers that did get federal money for helping people go through modifications, helping people go through forbearance. The sinister side of me is saying, well there are loan servicers there that are putting people into forbearance. Now I may cause a short-term cash crunch because they still have to pay the investors but if they can get through it there’s a huge payday from the feds a little bit further down the rock, down the line. Whether that’s true or not, you know I don’t know, I would like to think that it’s not but just from what I’ve seen from consumers in and their responses to being put into forbearance without really, they’re asking about forbearance not asking to be put into the program. They just want to understand it and they were put into it without really consenting or understanding what they were signing up for. And I blame the media, I really, I blame the media. When I heard about it there. You can just skip three months, skip 6 months. It will not tack on to the end.

Maryann: The media on both sides is just awful.

Patrick: Here’s just a wacky set of circumstances. Again, I’ve got colleagues all over the country, we network and communicate on how to best serve our clients and different you know, marketing ideas and things like that. So hasn’t happened with any of my clients but so my colleagues are reporting that there are consumers out there that they’re working with that have a loan in the process haven’t closed, so they don’t have the keys, they don’t own the house and they’re already asking how they can go into forbearance once they own the house. If you’re buying a house

Maryann: Then don’t get the loan.

Patrick: Exactly. If you’re buying a house and you automatically want to go to forbearance, maybe you’re not ready to be a homeowner. Now to make matters even worse there are some I don’t want to call them advertisements but essentially Facebook posts from real estate agents that are promoting that as a benefit. Hey buy a house and you don’t have to make payments for six months it is such a twist on what’s happening.

Maryann: I actually can’t believe that’s legal.

Patrick: Oh, it’s not. It’s 100% not. I’m not saying it’s okay but it’s happening.

Maryann: What’s your projection, the one thing I’m keeping an eye on is the unemployment rate. It’s got to be at least doubled from what we had from 2008 situation, essentially going to be fingers crossed, shorter but I don’t think everybody immediately can go back to work and everything’s going to be hunky-dory

Patrick: Let me give you the stats here, in quickly I got to give a quick shout out if you don’t mind. I have to have credit to one of the information that I’ve gathered, a lot of the data a friend and mentor of mine in the business by the name of Barry Habib. He runs a company called MBS highway, Mortgage-Backed Securities which is where all of the mortgage money comes from. Barry has been a huge champion for our industry for loan officers as well as real estate agents. A lot of the data that I’m pulling I’m going to cite Barry as my store. Hopefully, you can see Barry, kudos to you. Thanks, pal.

Maryann: Does Barry have a public website?

Patrick: Absolutely. Wherever you post this you know you can tag him as well. He’s got a Facebook page it’s Barry HABIB and the name of the company is MBS as in Mortgage-Backed Securities highway. He’s you know mostly on Facebook. He got LinkedIn and all social media.
Maryann: Once we get this up on YouTube, we can put it in as one of the links down below.

Patrick: I know that he’d love that. If there are any you know mortgage industry professionals that are watching this and you don’t subscribe to Barry’s stuff, you’re out of your mind.

Maryann: Now I want to subscribe.

Patrick: You know, you’re not doing a very good job for your client if you don’t subscribe to this.

Maryann: Sure

Patrick: Anyway, here’s the information that I was able to glean from Barry’s site and the information and content that he puts out. So, in the US, there are 164 million people in the workforce. So that’s the stat to start with. Prior to covid19 hitting, there was about a 3 ½% unemployment rate. Just shy of 6 million people rounded off call it 6 million. That was the unemployment rate before covid19. As of April 10th, they added, so the unemployment ranks added an additional 22 million people. As of April 10th, it was 28 million people filing for unemployment that’s about 17% of the workforce. It gets better or maybe not

Maryann: I’m not an expert but 28%, I mean is that

Patrick: I’m sorry 28 million which is 17%

Maryann: 17%. Okay. Thank you.

Patrick: Yep. 17%.

Maryann: So that’s probably one of the largest, I mean baked in the ’80s maybe?
Patrick: It is more than the Great Depression.

Maryann: Great Depression, okay. So, we’re surpassing the 80s. We’re back in the Great Depression. Okay.

Patrick: Will blow and the bloody bin clothes, were blowing all those numbers out of the water. The jobless claims come out on Thursday, we’re recording this what’s today Tuesday, so this week’s numbers yet but based on the initial predictions it’s likely that later this week the stats are going to be just over 20 percent and before this, all settles down just about everybody out there is predicting about 25% unemployment. Take a look at the Great Recession. the Great Depression the numbers were half that less than half that. Now that being said everybody is predicting a much sharper recovery as well that we should get back to the same levels of employment that were in place in you know, January, February you know before covid19 and about two years and if you’re part of the unemployed, two years is a long time but in the grand scheme of things recovery in the economy, two years is a pretty short window.

Maryann: Wow. This has been unbelievable such great information and I really appreciate it all Patrick. I’m going to hit you with my big question now.

Patrick: Okay. Hit me with it. What’s up?

Maryann: Which I didn’t pre-send to you but I’m curious. I mean with all of this I’m going to I have an idea but I’m curious, what about short sales? Do you think we’re going to see a spike after all this?

Patrick: I don’t know but my gut tells me not as much as we saw last time.

Maryann: That’s what I was saying too. Not as much as 2008 but

Patrick: I mean we still have huge demand. There’s still such a limited inventory last stat we took a look at which again was just prior to all this hitting was we were and of course, it’s regional, every region is different but right under a three months’ supply, less than three months’ worth to supply housing. So, we’re in the, you know, I think fair to say that the Metro Boston area, the general description of where we are, there’s still a huge demand for housing. There are significantly more buyers out there than there are homes for sale even despite the health concern. I still have clients that are out there are no open houses but they’re doing individual private showings all weekend, every weekend you know bouncing from house to house prearranged scheduled visits. There are still clients that are putting homes under the agreement. Closings are still taking place. I think that we do have a number of consumers out there that still have a strong equity position. So, where I think you’re going to see the short sale is happening are going to be the consumers that purchased recently. We’ll say in the past three years and use a loan product with a minimal down payment, 3% or 5%, they don’t have that equity position, they’ve suffered some financial losses from being laid off, maybe they did apply for forbearance, now that lump sum is due and it’s putting them upside down. I think that’s the target market for where the short sales are going to be. Anybody that bought their home you know for five, six, ten years ago just with the run-up and appreciation and run-up in values, I don’t think they’re going to be in a spot where they’re going to need to do a short sale. They may have enough equity if they have to

Maryann: They can just sell it as a traditional sell if they want to.

Patrick: Yeah

Maryann: Well, Patrick I want to thank you for coming today and allowing me to pick your brain about all this because I do find it fascinating. I think it’s going to be excellent information for you know, certainly my audience but anybody right now. I think this is excellent information for anybody right now that even has a mortgage and you know that may be struggling to make these payments. A little personal story I was so proud of my niece a few weeks ago, she said I’m taking my stimulus check and I’m going to pay my rent or her mortgage but and she put this long thing up about don’t waste this money if you have it and try to continue to make your payment’s because the repercussions obviously are not worth anything.

Patrick: Yeah. Don’t follow the tiger king model. Don’t buy a tiger with your stimulus check. Please, pay your mortgage.

Maryann: Let’s not do the Tiger king.

Patrick: Just remember forbearance is not your friend
Maryann: Forbearance not your friend.

Patrick: it is, I don’t say a financial last resort but think of it as one step above bankruptcy, that’s how significant of an impact it can have in your credit. That’s really the overriding sort of theme that I want to get out to everybody.
Maryann: Awesome. Thank You, Patrick. I’m going to you know I’ll hit the end of the recording right now but I’m going to send you a copy of this when we are done. I’ll let you know where the links are. I appreciate you coming on. Is there anything else you want to add? Tell us how people can reach you.

Patrick: Yeah. So, like we talked about at the beginning I’m the Wicked Awesome Loan Officer and that’s actually my landing page, my web page. Wickedawesomeloanofficer.com.

Maryann: Just google wicked awesome loan officer.

Patrick: Yep and my shining face are going to show up as itself. So online that’s a good way to get me, of course, I’m all over Facebook. A cell number for a call or a text 781-888-5678 or again just Google wicked awesome loan officer and I’m the only one.

Maryann: Me too. Google Short Sale Goddess. It’s just me. Thanks, Patrick. Have a great day. Bye.

Patrick: All right. Bye.


Maryann Little from Short Sale Mitigation Part 2 of 2 talks with Patrick Queally about how forbearance truly affects your credit and how the Corona Virus Crisis is going to impact the mortgage industry

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