NEW YORK–Some mortgage lenders are asking borrowers who are taking out mortgages to confirm they don’t intend to seek forbearance, a move meant to keep losses low during the coronavirus pandemic, according to a new report.
“The unusual requirement comes in the form of a new document included in many borrowers’ closing paperwork,” the Wall Street Journal reported. “While the language varies, the forms generally tell borrowers that they won’t be allowed to skip payments until their loans are backed by the government, according to forms reviewed by The Wall Street Journal. The forms, known among lenders as “Covid-19 borrower certifications,” often ask home buyers to confirm that they don’t expect changes to their income. Some warn of potential penalties if any of the certifications are later proven to be false.”
The Journal noted the $2-trillion CARES Act allows struggling homeowners to request up to 12 months of forbearance on federally backed home loans. But it can take days, weeks or sometimes even months for a newly made loan to get government backing.
The Journal noted Fannie Mae and Freddie Mac are still buying loans in forbearance, but at a discount of either 5% or 7% of the loan’s value, depending on whether the borrower is a first-time homebuyer. The Federal Housing Administration said it would insure loans in forbearance but could charge the lender a 20% fee if the loan goes into foreclosure, the Journal added.
“Lenders are struggling to figure out which borrowers will be able to pay back their loans,” the Journal said.
“Millions of Americans are behind on their debts, but their missed payments aren’t reflected in their credit scores or uniformly recorded on their credit reports because of protections in the stimulus law.”
An Added Concern
For mortgage lenders, the forbearance penalty is an added concern, according to the Journal.
“The hit more than wipes out your margin—over something you have no control over,” Esther Phillips, senior vice president of sales at Key Mortgage Services Inc., told the Journal. “You can’t control what customers do after you close.” Key’s form asks borrowers to certify they haven’t applied for forbearance from any mortgage payments and have no plans to ask for it.”
The share of mortgages in forbearance, 7.2%, has declined for 10 straight weeks, according to the Mortgage Bankers Association, but is still far above pre-pandemic levels. The Urban Institute has estimated that just 3,750 loans will be subject to the forbearance penalty, the Journal said.