Mortgage Forbearance Rate Drops as Protections Get Extended

Fewer home loans are in forbearance -- but exits may slow down thanks to newly extended protections.

It's often said that homeowners enjoy more financial stability than renters do, yet many homeowners have struggled immensely during the coronavirus pandemic. Thankfully, there's been relief available to mortgage borrowers in the form of forbearance.

As part of the CARES Act, which was signed into law in late March of 2020 to provide coronavirus relief, mortgage lenders are required to allow homeowners to put their loans into forbearance if they claim they're facing any sort of economic hardship (and they can't ask for proof of that hardship, either). Payments are paused for mortgages in forbearance, though they're not forgiven, and borrowers in forbearance cannot be reported as delinquent on their home loans to the major credit bureaus.

Mortgage forbearance rates fell slightly to 5.29% for the week ending Feb. 7, according to the Mortgage Bankers Association. That leaves 2.6 million homeowners with active forbearance plans.

Now, at first glance, an uptick in forbearance plan exits may read like a sign that the U.S. economy is improving. But actually, that trend may be temporary. The reason? Forbearance protections were recently extended. So now, homeowners have less of a reason to rush to resume their regularly-scheduled mortgage payments.

Added relief for homeowners

Originally, mortgage borrowers who put their home loans into forbearance were allowed to pause their payments for 180 days, followed by a 180-day extension. But earlier in February, forbearance was extended to 15 months, giving borrowers an extra 90 days to postpone making payments. And on Feb. 16, President Joe Biden extended the length of forbearance to 18 months for loans that were paused on or before June 30, 2020.

It's that very extension that may cause forbearance exits to slow down in the coming months. Of course, if things improve on the pandemic front and more jobs are added, we may see an increase in forbearance exits. But at this point, the pressure to come out of forbearance is off.

Another thing: Along with extending the amount of time a loan can remain in forbearance, the Biden administration also extended the deadline to apply for forbearance to June 30. As such, the percentage of total home loans in forbearance could trend upward in the coming months.

The downside of forbearance is that borrowers will eventually need to catch up on their payments once their forbearance ends, and that could prove burdensome. But one thing lenders cannot do is require borrowers to catch up via a lump-sum payment.

Generally, buyers can make up for missed mortgage payments by extending the length of their repayment periods or making higher monthly payments until they're all caught up. So borrowers who are struggling to pay their mortgages today should consider forbearance while that option is still on the table.

Making mortgage payments during forbearance is permissible -- it's just not required. As such, forbearance could buy a lot of homeowners the flexibility they need to get through the pandemic without putting themselves at risk of falling behind on their mortgages and damaging their credit scores in the process.