Mortgage Forbearance Rate Ticks Downward: A Good Sign for the Economy?

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Fewer homeowners have their loans paused, but what does that mean for the economy on a whole?

Many Americans have lost their jobs or seen their income suffer during the coronavirus pandemic. The good news is that there's relief available for homeowners in the form of mortgage forbearance.

With forbearance, you hit pause on your mortgage payment for a period of time. Right now, you're allowed up to 360 days without a payment if you can't swing one.

Normally, forbearance is something mortgage lenders can opt to deny, but right now, you're guaranteed to have that request approved if you ask for it on the basis of financial hardship. In fact, your lender isn't even allowed to ask you to supply proof of a hardship -- that's how flexible forbearance is these days.

Since the option to enter forbearance has been around since the CARES Act was signed into law in late March of 2020, millions of home loans have spent most of the past year in forbearance. But new data from the Mortgage Bankers Association shows that the U.S. forbearance rate is falling. Specifically, it fell three basis points to 5.35% last week. And while that's not a significant decline, it's meaningful nonetheless.

Homeowners whose loans were paused at the start of the pandemic haven't yet run down that 360-day clock. As such, if more loans are exiting forbearance now, it could be a sign that borrowers' financial situations are improving enough for them to start making payments again. And that could indicate that the U.S. economy is slowly but surely on its way to a broader recovery.

Forbearance exits to pick up soon

Right now, a lot of homeowners who are exiting forbearance may be doing so voluntarily -- and that's a good thing. But that could change in the near term. In fact, in March and April, the number of mortgages in forbearance could drop even further, but not because borrowers are doing better financially. Rather, for a lot of people, forbearance will come to an end because they've used up their 360 days.

In fact, some housing experts worry that we could soon see a wave of foreclosures if too many borrowers who exit forbearance still find themselves unable to pay. That said, there's already a foreclosure ban in place through March 31, and there's a good chance it will be extended beyond that point. As such, homeowners who wrap up forbearance but can't pay may not be totally out of luck.

Furthermore, there's a chance lenders will work with borrowers who can't pay their mortgages in full following forbearance. In these cases, loan modification may be an option as well as mortgage refinancing. Both options could result in lower, more affordable monthly payments.

Is there a reason to be optimistic?

Ultimately, we can't directly tie a decrease in forbearance rates -- especially a modest one -- to the beginnings of a widespread economic recovery, but what we can do is hope that's the case. There are other signs that the economy may soon be in for better days, too. For example, the U.S. unemployment rate fell to 6.3% in January as 49,000 new jobs were added. That's the lowest the jobless rate has been since April. Furthermore, as vaccine rollouts continue, things could improve on the pandemic front, and once that happens, businesses may be able to operate with fewer restrictions. That too could help the economy tremendously.

All told, there's reason to be hopeful that the U.S. economy may be on its way back up -- and a dropping forbearance rate certainly lends to that line of thinking.