The problem with mortgages during coronavirus

Let’s say you own a house and have a mortgage. And you’ve been laid off, furloughed, had your pay cut or your hours reduced at work because of the coronavirus panic. You are in a jam. So you are hoping for what is called “forbearance” on the mortgage payments, which in simple terms means your …

Let’s say you own a house and have a mortgage. And you’ve been laid off, furloughed, had your pay cut or your hours reduced at work because of the coronavirus panic.

You are in a jam.

So you are hoping for what is called “forbearance” on the mortgage payments, which in simple terms means your bank will back off for a few months until you can get your family’s finances in the upright position.

But there is a problem with forbearance. I’ll let a reader of mine explain it:

John: I am semi-retired and live on a relatively fixed income. Like millions of others, I have been furloughed from my job due to the coronavirus pandemic, but still have bills to pay — most importantly, my mortgage payment to Chase bank.

Our governor has asked banks doing business in Connecticut to offer forgiveness on mortgage payments for 90 days to those of us who are in this precarious situation. So I tried to contact Chase bank re: same.

It’s not possible to talk to a live person, but I did get a recording stating that a 90-day “forbearance” policy is in place. But the three months forbearance amount is due in full after the 90-day period.

If I’m struggling now, how in the world am I going to afford a lump sum payment of almost $6,000 in three months? M.D.

There is a simple solution to this problem, but not everyone can use it. I’ll explain. Something has to be done about this, and I’m trying to do just that.

Rather than giving homeowners an extra 90 days to pay — which, like M.D. says, they won’t be able to handle — banks and other mortgage companies should simply add three months, or six months, or a year to the end of the present mortgage.

This way M.D. and all the other millions of stressed mortgage holders can restart their payments once the economy is out of its coma and jobs are again available. Banks lose a little income right now, but they make it up on the back end of the mortgage.

Simple!

But it’s not. And here’s why.

Not all mortgages are owned by the places where the payments are going. Chase, for instance, might only be servicing M.D.’s mortgage. The loan itself could have been sold to another investor, or packaged into what is called a mortgage-backed security.

When the loan is sold, it’s up to the new owner to decide if he’ll allow the mortgage to be extended, or whether the homeowner is merely given 90 days of forbearance — or no forbearance at all.

And if the mortgage is on a house that’s worth a lot more than the outstanding loan balance, then the mortgage holder may just decide to foreclose on the property.

It sucks. And it’s not very nice. But that’s the way loans work.

So, the solution is for the Trump administration and Congress (and whoever else needs to get involved) to make forbearance and, especially, mortgage loan extensions mandatory.

Mortgage investors — banks, investment firms, Fannie Mae — need to be required to place payments that must be missed now because of coronavirus hardship on the back end of the loans. Fannie Mae, especially, must be required to do that, since it is by far the largest buyer of mortgages in the US.

A source at a major bank told me it wouldn’t be out of the question to extend loans that it still owns. But there is a problem when a bank doesn’t own the debt anymore and is just servicing it for an investor.

By the way, last week I explained this problem to someone with close connections to the Trump administration. So hopefully this is already being worked on.

As for M.D., Chase got back to him after I spoke with the bank. He was told the options that would be considered are “extending your payment assistance period, adding the missed principal and interest to the end of the loan, a repayment plan or a modification.”

So if putting the mortgage payments you can’t make on the end of your loan seems good to you, ask your bank. Maybe the bank will say yes.

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