Will forbearance slip into foreclosure?

With the COVID 19 pandemic still spreading and the government relief programs are about to run out we will see a surge in foreclosures, according to a new report by Federal Reserve economists.

Economists for the Federal Reserve Bank of Atlanta wrote in the report “So far, the principal policy response to the COVID-19 pandemic in the U.S. mortgage market has been forbearance.”  

According to real estate data firm Black Knight – 4.58 million homeowners were in forbearance plans, representing about 8.6% of all active mortgages. 

Together, all mortgages in forbearance represent about $995 billion in unpaid principal.

The idea of forbearance sounded pretty good. Who wouldn’t want to put off paying their mortgage when the finances are tight, especially if you have just lost your job or are worried you might be about to! 

The problem with forbearance is, in most cases, it only provides a short reprieve from paying your mortgage—Homeowners with federally backed mortgages are eligible for up to 180 days of forbearance initially under the CARES Act. 

At that point, if they are still facing financial difficulty, they can request an extension of up to another 180 days of forbearance. 

“Under a forbearance agreement, a borrower can pause payments entirely or make reduced payments on their mortgage. 

The Fed economists pointed out that many of those who are unemployed right now, have been able to make ends meet because of the $600-per-week federal unemployment benefit provided through the CARES Act. 

However, that benefit is about to expire on 31st July, and COVID-19 cases are rising at an alarming rate with a high percentage of people testing positive for the virus.

This raise in COVID-19 could mean extended business closures, in turn, leading to more unemployment. The Fed economists worry, that more homeowners may cascade into foreclosure.