With the real estate market shut down since mid-March Mike Donoghue, president of Premium Mortgage in Brighton, thought the mortgage market would dry up.
"We expected massive fallout of our active pipeline as a result of COVID-19 quarantine," Donoghue said. "It was remarkably low."
At the start of the shutdown, Premium Mortgage had more than 1,000 purchases or refinances mortgages in process. Today, fewer than 50 transactions died as a result of COVID-19 layoffs or furloughs. In fact, in the company's 20 years of providing mortgages, April 2020 will go down as the busiest month on record, with $100 million in loans funded, Donoghue said. Even more surprising is that Premium's April 2020 volume was up from April 2019, due in large part to refinance activity.
Another anticipated result of the shutdown was forbearance, the special agreement between lender and borrower to delay mortgage payments when borrowers are unable to meet their repayment terms. Yet the number of people seeking forbearance has also been less than expected, Donoghue said.
Donoghue shares some insight into what's happening in local real estate.
1. Are people asking to delay mortgage payments during the shutdown?
Fortunately we have not seen a large number of requests for forbearance, but since we do not service mortgages that is to be expected. The few calls we did field, we asked if they had been laid off or had income interruption. Surprisingly, none of those borrowers had income interruption and just wanted to take advantage of the skipped payments. I would strongly caution those who don’t have a need (for a delay) to make payments as agreed. According to the Mortgage Bankers Association, close to 7% of home loan borrowers are putting off mortgage payments with forbearance agreements, up from only 0.25% of loans before the pandemic set in the week of March 2.
2. What should consumers know before asking for forbearance?
Even though a forbearance due to COVID-19 does not affect a borrower's credit score, a forbearance notation does show on the credit report. For borrowers looking to refinance, opting into a forbearance plan will more than likely prevent them from being able to refinance unless they bring all payments current. As far as purchasing a new home, since this program is fairly new and not yet fully vetted we would caution people that even though the mortgage servicers were instructed to suspend reporting forbearance to the credit bureau, we feel there may be some missteps with this and your credit could inadvertently be negatively affected in the short term. This could cause issues with obtaining mortgage financing in the future. For this reason we encourage people to continue making their mortgage payments so long as they are financially able.
3. What if the homeowners cannot come up with the lump sum owed after three months of delays?
Once forbearance is over, if the borrower can’t come up with the lump sum owed, the mortgage servicer is mandated to work with a borrower on a permanent plan. They will either take the lump some owed and add it to future mortgage payments, resulting in higher monthly payments going forward, or they will allow you to modify your mortgage, which could reduce your monthly mortgage payment but could also add additional months to the term of your current mortgage.
4. Does forbearance have negative effects?
Mortgage servicers were instructed to suspend reporting past due payments to the credit bureaus for borrowers opting to go into a forbearance plan. Also, there are to be no penalties or late fees for homeowners in a forbearance plan. We have already seen credit reports reflecting that the loan is in forbearance. The government can give guidance on penalties and credit reporting, but from a practical perspective somebody who is planning on refinancing or buying in the next few years should use forbearance as a last resort.
5. Would you recommend forbearance for people who just don’t have an income right now?
Yes. This forbearance help is for people who need it because of economic hardship due to the coronavirus. If due to the coronavirus they have circumstances that have occurred in their life that make it difficult to make their mortgage payment, they should certainly contact their current mortgage servicer and see what help is available to them. In no instance should a borrower just stop making their mortgage payments. This will affect their credit and could have dire consequences when they apply for a mortgage, car loan, insurance, etc.
Most mortgages have an escrow account to pay property taxes and insurance. By entering forbearance, you may be able to work out the mortgage terms with the servicer but you won't be able to defer taxes or insurance. Ultimately the servicer will likely pay the shortage and then increase your payment going forward. Unintended but real consequences.