According to the CARES Act, the broad relief bill signed into law in March 2020, homeowners who could plead financial difficulties and request tolerance could not be denied. Under tolerance, monthly mortgage payments can be paused without being registered as delinquent. And this is important, because defaults appear in credit reports, and can send credit scores in free fall.
As so many homeowners took advantage of the tolerance, the default rate for mortgages on one- to four-unit residential properties dropped to 6.38% of all outstanding loans at the end of the first quarter of 2021, according to the National Delinquency Survey of the Association of Mortgage Bankers. This represents a small drop compared to the fourth quarter of 2020. But will this rate continue to fall or could it increase in the near future?
What happens when tolerance ends?
When tolerance was first put into practice, homeowners got a 12-month extension on their mortgage payments. The tolerance was then extended to last up to 18 months.
But soon, borrowers who put their mortgages into tolerance at the start of the pandemic will see that option run out. There is concern that we may see default rates rise – and see the foreclosure rates boom in the months ahead.
It is in the interest of homeowners and credit agents to avoid this scenario. The Consumer Financial Protection Bureau (CFPB) has proposed a rule banning foreclosures for the remainder of 2021. This rule, in turn, would protect borrowers whose finances have not improved until the end of grace periods.
That said, the CFPB also made it clear that it expects mortgage lenders to work with borrowers so they can stay in your homes when tolerance runs out. To that end, credit agents are expected to modify the mortgage terms so that homeowners can meet their payments.
As it stands, lenders cannot demand a lump sum repayment to compensate for missed mortgage payments under tolerance, and many will likely extend borrowers’ loan terms to allow for recovery payments in the end. Loan modification could take this concept a step further, extending mortgage repayment schedules so that monthly payments would decrease and make it easier for borrowers to change positions.
Although many people are better positioned financially now than at the beginning of the pandemic, not everyone has recovered. If loan officers continue to work with borrowers, we may see default rates remain at lower levels or even drop in the coming quarters. But if credit agents are not flexible, not only will default rates be able to skyrocket, but we could face a foreclosure crisis like no other.
Interest rates are unlikely to remain at the lows of several decades for much longer. That is why taking action today is crucial, whether you want to refinance and cut your mortgage payment or are ready to pull the trigger on buying a new home.