2020 Ends With 2.8 Million Americans in Mortgage Forbearance

Millions of homeowners still aren't making mortgage payments. Will things improve in 2021?

Millions of Americans have been struggling financially during the coronavirus pandemic, and that extends to homeowners. Thankfully, there's been relief in the form of mortgage forbearance.

Forbearance allows borrowers to hit pause on their mortgage payments without damaging their credit. If a loan's in forbearance, mortgage lenders can't report it as delinquent to the credit bureaus. Those payments are not forgiven, though. Borrowers will still have to catch them up at some point.

Normally, mortgage lenders can choose to deny forbearance, but under the CARES Act, most borrowers are entitled to an initial 180-day period of paused mortgage payments followed by a 180-day extension upon request. All told, borrowers can get out of making mortgage payments for roughly a year.

Forbearance rates had started to drop earlier in the year, but the number of mortgages in forbearance rose by 20,000 last week, according to data analytics company Black Knight. This means an estimated 2.8 million homeowners still have mortgages in forbearance.

Will forbearance rates fall in 2021?

Many homeowners who put their mortgages into forbearance this year will see that provision expire at some point in 2021. As such, forbearance rates may very well decrease substantially next year. But that doesn't mean Americans will necessarily be in a stronger position to start making mortgage payments again. And those who can't keep up will face some hard choices.

Of course, lenders may be willing to grant borrowers a fair amount of flexibility at the end of their forbearance periods. For one thing, lenders cannot demand that they catch up in a single lump sum. Lenders might allow borrowers to modify the terms of their mortgages to make them easier to keep up with. And for borrowers with strong credit despite their recent financial hardships, refinancing is an option too. Lowering a home loan's interest rate substantially could result in much lower monthly payments, thereby making them more affordable.

But for those in true dire financial straits, selling the home and walking away may be the only choice. The good news in this regard is that home values have skyrocketed over the past six months. Buyer demand has surged due to low mortgage rates and limited housing inventory. As such, struggling homeowners who come out of forbearance are less likely to be underwater on their mortgages (a term that applies when a home's market value isn't enough to cover its outstanding mortgage balance).

Those who do end up underwater, however, might need to work with their lenders to agree to a short sale. That's not an ideal route to take, as it tends to have a negative impact on borrowers' credit scores, but for some, it may be the only option. Worse yet, lenders don't have to agree to it, and borrowers who then fall behind on their mortgages ultimately risk foreclosure.

Either way, the fact that 2.8 million Americans are ending 2020 with home loans in forbearance is a sign that we're still months away from anything close to a full economic recovery. A second coronavirus relief bill was recently passed. But it may not be enough to keep struggling borrowers in their homes once forbearance runs out.