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Kevin Santacroce
To prevent foreclosures while homeowners are out of work due to social distancing measures, Congress’s first COVID-19 relief bill required servicers of federally backed loans to offer clients a break on making mortgage payments for up to a year, but some are finding that mortgage forbearance does not deliver useful relief.
Some banks are telling clients that at the end of their forbearance period they need to pay up immediately — sending one balloon payment to make up for all the monthly payments they didn’t make. In that case, mortgage forbearance may delay financial pain, but it does not alleviate it. However, homeowners may be entitled to other payment options that their lenders are not advertising upfront. The discussions on all the options available may not happen for some borrowers until their forbearance is about to expire and it is clear that they cannot afford to pay up all at once.
Fannie Mae and Freddie Mac, which buy mortgages from lenders and package the loans as mortgage-backed securities, have declared that borrowers under their auspices cannot be required to catch up on their payments in a lump sum. Fannie Mae- and Freddie Mac-backed mortgages represent a large chunk of home loans in the United States, so most homeowners on forbearance will be able to avoid a balloon payment when the period expires.
Forbearance does not reduce how much borrowers owe. Rather, payments are temporarily reduced or paused without fear of foreclosure or taking a hit to a credit score, and borrowers make up for the missed payments later. Mortgage forbearance under the Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, was pitched as a way for homeowners to skip payments now and tack extra months on to the end of their original loan period. Or, when they resume payments, they could pay a little more every month than they normally would. The bank doesn’t lose any money — and potentially avoids a costly foreclosure process — and the homeowner gets help over a hurdle during an extraordinary time.
The CARES act prohibits banks from charging fees or additional interest, though the mortgage balance will accrue interest at its normal rate. As long as a loan is on forbearance, late payments will not be reported to credit agencies.
Governor Andrew Cuomo issued an executive order in late March requiring all New York State-regulated financial institutions to provide residential mortgage forbearance to New Yorkers experiencing financial hardship due to the pandemic. Between the state and federal decisions, nearly all mortgages in New York State are eligible for forbearance, and even lenders that are not required to offer forbearance may still do so.
Kevin Santacroce, the chief lending officer and executive vice president at BNB Bank, said BNB has executed forbearance agreements on 63 residential mortgages owing a total of $38 million, as well as 233 commercial mortgage moratoriums that add up to $350 million.
The bank, headquartered in Bridgehampton, is moving payments to the end of the original mortgage period, rather than asking for a balloon payment in the near future.
“We are primarily advocating to put the payment on the back-end, not necessarily asking them to come up with it after the three months or four months, because most people aren’t working now,” Mr. Santacroce said. “They can’t come up with three months of payments in one payment, so it doesn’t make a lot of sense to put that type of financial pressure on them. The idea is to let us all kind of work together to get us through the situation, to get back to some stability. Then we can all figure out how to work with the debt that was deferred and the interest that was deferred, but in a more manageable situation.”
As the initial 90-day forbearance period approaches its end, BNB will approach customers to assess their financial situation and see if the forbearance should be extended another 90 days, he said. And unless there is a dramatic change, he said, such as the availability of a vaccine enabling the state to reopen, he imagines that most clients will need an extension.
Rather than selling its mortgages on the secondary market to an entity such as Fannie Mae or Freddie Mac, BNB holds mortgages on its own balance sheet, Mr. Santacroce noted. The bank has other sources of cash flow, so it can weather a few months of fewer mortgage payments coming in, he added.
The Consumer Financial Protection Bureau says that those who can keep up with payments should keep making payments. For those who still will not be able to make mortgage payments after their forbearance ends, the bureau encourages homeowners to contact their lender to discuss options.
About 3.5 million borrowers have already ceased mortgage payments, representing 7 percent of all outstanding residential mortgages, according to a Mortgage Bankers Association survey completed April 19.
Forbearance does not start automatically when a payment is missed; homeowners have to ask their mortgage servicer for it. However, New York State Attorney General Letitia James wants banks to change that. She sent letters last month to 35 major New York mortgage servicers calling on them to provide long-term relief for homeowners who are struggling.
“We cannot afford to repeat the costly mistakes of the 2008 foreclosure crisis, which is why I am calling on mortgage service providers to take steps to help homeowners impacted by this crisis,” Ms. James said in a statement.
She is asking servicers to automatically waive late fees and place homeowners in a three-month forbearance as soon as a payment is missed, whether or not the homeowner requested forbearance, and she wants homeowners to be able to renew that 90-day forbearance for up to one year.
