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The CARES Act, while helpful in the short term, has put mortgage servicers in financial distress that will hurt homeowners if officials don’t act.
- Eddie Latimer is founding director of local nonprofit Affordable Housing Resources.
Recovering from the mortgage foreclosure crisis of 2010-2015, federal mortgage agencies realize the worldwide pandemic is driving another hard-hitting crisis.
COVID-19 has stricken the mortgage finance industry and has forced unintended consequences and struggles for all involved – the lenders, the servicers and the homeowners.
Free mortgage forbearance programs created for homeowners affected by the pandemic are offering immediate relief, but it’s a ticking time bomb once the grace period is over.
Additional services and mitigation needs must be met to have a chance to stop the nearing threat of foreclosures for our homeowners – a catastrophic threat to thousands of Tennesseans.
Lower-income homeowners will catch the brunt of a mortgage crisis
The impending COVID-19 mortgage crisis will have a greater impact on lower-income and older homeowners, with over 80% backed with federal mortgages. The lower-income population makes up much of the nation’s workforce, and as a percentage, are likely to be first time home buyers, single women and people of color.
The pandemic came fast. What seemed like overnight, a massive number of responsible, working homeowners lost their jobs. In response to this sudden wave of unemployment, federally controlled mortgage agencies like Fannie Mae, Freddie Mac, Federal Housing Administration, Rural Development and Veterans Administration offered the recent unemployed homeowners a 90-day “mortgage holiday” or forbearance.
This offer, part of the CARES Act, was designed for homeowners with federally backed mortgages to call their mortgage servicer to extend the forbearance for an additional 90 days if necessary.
As the pandemic continues to disrupt and consume the nation, it became necessary to extend an extra 180-day forbearance to these homeowners that were still unemployed or underemployed because of the pandemic – amounting to a 360-day holiday.
These forbearance programs help homeowners who had become victims of a disaster due to no fault of their own. However, these mortgage forbearance programs have placed heavy burdens on the mortgage servicers.
Mortgage servicers under stress
Mortgage owners, or lenders, contract out the servicing of monthly mortgage payments to mortgage servicers. Meaning, most homeowners do not pay the organization from whom they obtained their mortgage, but rather, they pay one of the smaller mortgage servicers that are contracted by the larger mortgage lenders.
The entire mortgage servicer industry has now become the scapegoat for the financial responsibility of skipped mortgage payments since the start of the pandemic.
The typical agreement ensures that servicers collect payments in a timely manner, and if the homeowner does not follow through with the payments, then the mortgage servicer has the legal authority to foreclose on the home.
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The CARES Act has changed the traditional order of operations for mortgage servicers. If a homeowner was current on their mortgage payment before the start of the pandemic causing their unemployment, and they fall behind on their payments, then the homeowner cannot face foreclosure.
Affected homeowners may not have to pay their servicer for up to a year, but this does not take away the obligation of the servicer to the lender. This means that mortgage servicers need to pay millions of dollars to the mortgage owners from their own pockets because they are not getting it from the homeowners. These servicers’ cash reserves are not capable of bearing this financial burden.
These struggling and overworked mortgage servicers are giving all homeowners the required 90-day forbearance. But because of the financial hardship they are facing, many are only capable of offering the single 90-day forbearance and expect full payment of the three months skipped. Whether these homeowners are employed after the 90-day period or not, it is unlikely homeowners will be able to pay what is owed.
Quick action is needed to stall a crisis
The best resolution we should all seek is to offer a mortgage mitigation service where these mortgage servicers can rework the mortgage payment plan to follow a more affordable mortgage payment within 30% of the homeowner’s current income. By doing this, the chance of a home being foreclosed on is much less, the homeowner keeps their equity and peace of mind, and the mortgage servicers have a new, revised mortgage service agreement with the mortgage owner they can afford.
It is crucial to arrive at this solution because if servicers are unable to mitigate for new, affordable mortgages for homeowners, then this country will have an overwhelming wave of foreclosures, much worse than the 2010 foreclosure crisis.
The grace of the CARES Act is needed relief for homeowners affected by COVID-19. But the inadvertent burden these relief programs are placing on the servicers weighs heavy on the industry. By quickly realizing the negative consequences the forbearances can have, the sooner active steps can be taken in mitigating these agreements, keeping people in their homes and the whole mortgage industry solvent. But make no mistake, action is needed now.
Eddie Latimer is founding director of local nonprofit Affordable Housing Resources.
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