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Mortgage Forbearance And The Hidden Gotcha: Escrow

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forbearance escrow

Got a mortgage forbearance? Watch out for the escrowed taxes after the forbearance is up.

While the CARES Act made forbearance on federally backed mortgages available for the asking. But no one talked about the escrow portion of the skipped mortgage payments.

Federal guidance urged servicers to offer easy ways to pay the skipped payments after forbearance but seems to have skipped any discussion of a timeline for making the lender whole for taxes due during the forbearance.

So, if you need a forbearance, make a plan for the escrow shortage.

What are escrow items

If your lender or mortgage servicer collects property taxes and/or homeowner’s insurance along with your loan payment, those are escrow items.

In essence, the servicer collects monthly a slice of funds that are paid out only once or twice a year, but are required to keep the taxes paid and the home insured. The servicer pays them when due, on your behalf.

Escrowed taxes after forbearance

At the end of the forbearance period, the payments skipped remain due. But, there’s no single way that the details of the repayment will be handled. The skipped payments may simply be due at the end of the loan. The loan may be modified. The rules may change yet again.

But what seems clear, now, is that the skipped escrow payments may be due far sooner than the principal and interest accrued during the forbearance. Existing law gives the lender/servicer the right to increase the escrow portion of the future payments to recapture the missed escrow payments.

The standard period for recapturing escrow shortages is to add one/twelfth of the total escrow default to the monthly payments for a year. Fannie Mae and Freddie Mac have instructed servicers to extend the period for paying the escrow shortfall to 60 months.

Keep escrow in mind

The issues arising in the COVID-19 emergency and the multitude of different kinds of home loans make this subject complicated and not subject to a single, simple answer.

And whatever guidance we have now may well be upended by the next legislative remedy that governments and lenders propose.

The takeaway is to be mindful of the escrow portion of the payments missed in any forbearance, and to ask questions about how any deferral or modification affects escrow shortages.

Or, if your circumstances permit, set aside the escrow portion of your regular monthly payment each month of the forbearance, so you can pay that amount at the end of the forbearance.

How to tell if your mortgage is backed by Fannie or Freddie.

Fannie and Freddie have online look up tools that need only the property address and the last four digits of your Social Security Number to perform a search.

• Fannie Mae: http://www.knowyouroptions.com/loanlookup
• Freddie Mac: https://ww3.freddiemac.com/corporate

More on finances and Covid

Guide to surviving the pandemic driven economic downturn

Mortgage Forbearance For Non-government Backed Loans

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Covid 19 home loan forbearance

Are you one of the homeowners whose mortgage isn’t eligible for the government’s COVID forbearance protections?

Home loans not backed by the federal government are excluded from the protections for borrowers implemented by FHFA .

But as much as one third of US home loans are not backed by the federal government. If that includes you, here’s what the National Consumer Law Center has to say about your options in times of COVID-19.

Assisting Homeowners Who Do NOT Have a Federally Backed Mortgage Loan

If a homeowner has a mortgage loan that does not meet the definition of “federally backed mortgage loan,” CARES Act protections do not apply (except for the credit reporting provisions in CARES Act § 4021, discussed above).

State Foreclosure Relief

Many states have adopted broad foreclosure moratoriums that protect borrowers regardless of loan type, and some states have instituted mortgage loan forbearance programs.

For a continuously updated list, showing which actions are still current, see Covid-19 State Foreclosure Moratoriums and Stays.

Voluntary Federal Guidance

Federal bank regulators have issued guidance encouraging institutions to work with borrowers and relaxing some standards that may previously have limited a servicer’s flexibility to offer relief.

How to Get Non-CARES Act Relief and What to Ask For

Borrowers should contact their servicer by phone or online. Online may be the faster option as servicers are currently overwhelmed by the number of calls they are receiving. Log in to the borrower’s account and see what options the servicer is offering. It may be possible to apply online.

Borrowers can also request assistance by writing to the servicer. Check the servicer’s website or a recent account statement for the appropriate mailing address. Letters to the wrong address may be delayed or lost (or not effective if intended as a Request for Information).

Frame the letter as a Request for Information (RFI) about loss mitigation options. Such a letter will be governed by the response rules in RESPA’s Regulation X.

A sample RFI borrowers may use to ask about available loss mitigation options can be found here (PDF version) (MS Word). A sample RFI that advocates may use for information about a loss mitigation application can be found at of NCLC’s Mortgage Servicing and Loan Modifications Appx. E.2.7.

There is a private right of action to enforce these rules.

Used with permission. The entire NCLC article is found here.

Protecting your home

For those with loans not backed by the government, the options are clearly going to be less standardized and less predictable.

It’s worth watching the news for further government programs that impact non-federal home loans: the situation is certainly in flux.

Know that if you can’t reach an acceptable deal with your servicer, Chapter 13 is a workable tool for curing mortgage arrears while being protected from forclosure.

More

How Chapter 13 works to save your home

Bills I Gotta Pay, But There’s A Pandemic Out There

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bills to payI have bills I have to pay but no income.

That despairing line was repeated over and over again in interviews with pandemic-furloughed workers on last night’s news.

COVID-19 has ground the economy to a halt, no one’s working, and no money is flowing.

Whether it’s called social distancing, shelter in place, quarantine, or lock-down, hordes of us are off work and out of public spaces.

Yet the worry about meeting our financial obligations weighs everyone down.

I want to tackle just a small piece of the problem, the sense that there are bills one HAS to pay.

Maybe usually.

Maybe eventually.

But not necessarily now.

This consumer lawyer‘s  take on our situation suggests that you set aside existing money habits and fretting about the future.

Stress itself is deadly, and your first goal is to stay healthy.

What you need to know to tamp down stress

Why do you HAVE to pay?

Let’s look at why everyone interviewed repeated that they HAD to pay bills.

What is it that makes payment imperative?

At bottom, you have to pay to avoid unpleasant, legal consequences:  eviction, garnishment, repossession, or levy.

Legal consequences take time.  They also take lawyers, judges, process servers, and tow truck drivers.

And, right now, all of those folks are also at home, off work.  They aren’t available to impose legal consequences on you for non-payment.

Further, many jurisdictions have banned evictions, foreclosures, and collection actions.

The turnip theory of collection

Smart creditors (the people you owe money to) know, just like our grandparents:

You can’t get blood out of a turnip.

Or, as I tell bankruptcy creditor clients, there’s no point in suing someone who has nothing available to pay a judgment.

And, for the moment, most all of us are turnips.

The antelope survival strategy

How do relatively defenseless African antelopes survive as a species when faced with hungry lions?

It’s simple:  they birth their calves all at the same time.  Thus, there are far more infant antelope than it takes to keep lions well fed.

A few young are eaten while the rest grow stronger and faster each day and able to elude lions.

Consumers who have fallen behind on bills during the pandemic are the equivalent of young antelope:  there are far too many debtors for the creditor class to gobble up.

And for that reason, either self interest or governmental intervention will shield consumers from the usual consequences of not paying their bills.

The problem is simply too big for the usual rules to work.

The pen is mighty

Every creditor’s interim advice to consumers is “let us know you’re hurting”.

Do it:  write each of your creditors with a short explanation of how the pandemic has  impacted you.  Save a copy.

Get on record that you can’t pay for a damn good reason.

Survival expenses come first

Focus first on food and medicine. Things necessary to keep body and soul together.

Maybe add transportation to the extent necessary to gather food and medicine.

Note that these are “here and now” expenses, not left-over debts from before coronavirus.

When pandemic passes

Each of us can take solace in the fact that millions of us are in the same financial boat.

I fully expect there will be overarching remedies, governmental and business.  One of the most widely discussed (though superficial in my view) is a bar on negative credit reporting tied to the national emergency.

In the meantime, take care of yourself and your immediate needs.

Stay home, stay healthy, and stay hopeful.

More

Pandemic money tips on cars, mortgages, taxes, etc.

 

 

 

 

 

 

 

Home Mortgage Forbearance: Will It Save Your Home From Pandemic?

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mortgage forbearance

Mortgage forbearance for homeowners, shout the headlines.  No need to make a house payment.

Borrowers who can’t make this month’s mortgage payment were thrown a lifeline of sorts in the coronavirus rescue package.

Only it’s probably not the help you think it is.

And the lifeline may be far more fragile than you will need in the long run.

So, let’s take a tour of the CARES Act as it applies to home loans and see what the neighborhood looks like.

Not all home mortgages are covered

Only home loans that are made, owned or backed by an arm of the federal government are covered.  That’s approximately two-thirds of all home loans.

Fannie Mae and Freddie Mac handle most of the federal loans.  See whether your loan is one of the covered federally-backed loans with these look up tools.

Fannie Mae

Freddie Mac

If your loan is not federally backed, you need to look to your loan servicer or to local and state protections if you can’t make your mortgage payments.

Hardship must be virus-related

virus and moneyTo invoke the protections of the rescue package, your inability to make the mortgage payment has to be traceable to the virus or the fight against the virus.

Apparently, all that is required is a statement that your financial hardship is caused by the National Emergency.

No magic words, no sworn statements, no documentary proof.  Just blame the virus.

Claiming the protection

Early discussions said “call your lender”.  Well, we know how practical that is when millions are trying to get through on the phone.

Calling works, if you can connect.

Better, check out your servicer’s website for a Coronavirus hardship page.  Many allow you to sign up for help by checking a box, or sending an email through their site.

Always, when  claiming a benefit, follow up in writing with the statement of hardship and your contact info and loan number.

We have to expect screwups and delays.  As a society, we’ve never experienced a crisis this sudden, dire, and widespread. So back up your claim in writing, and keep a copy.

What is forbearance

The CARES Act offers forbearance to borrowers with federally backed loans.  Just what is forbearance.

Forbearance is a suspension of payments

In essence, the lender puts on hold its right to invoke legal consequences for failing to pay.

Contrast forbearance with deferral:  deferral adds missed payments to end of loan

Forbearance doesn’t change the amount due monthly, or change the life of the loan.

Importantly, at the end of the period of suspension, all of the suspended payments are then fully due.

Ouch!

So, take the six month forbearance provided in the law, and in month seven, those six months of payments are due. (The law allows for a request to extend the period of forbearance for another six months.  A request for a further forbearance MUST be made during the first period of forbearance.

What comes after forbearance

Here’s where the short-term nature of the remedy comes up short.  This bill just pushes the nonpayment problem down the pike.

What the feds are saying is that at the end of the forbearance period, each borrower will have to make a deal with their servicer to get current.

UPDATE:  Feds assure borrowers that their homes aren’t at risk of loss due to forbearance.  The alternatives are still to be worked out individually.

At the current time, there are no regulations or even templates about what that “deal” might look like.

But if you were involved in mortgage modifications following the Great Recession, you’ve looked into the maw of chaos.

Given the much broader path of these troubles,  the mess to follow will make 2008 look orderly.

What lenders are offering

enticing offerI’ve seen a number of offers stuffed in mortgage statements in the last month offering forbearance to borrowers, apparently without asking.

Typically, the lender offers to suspend payments for three months, with all missed payments due in month 4.  I’m fearful that borrowers will snap at that offer without understanding it, or without any real expectation of how they’ll make four months’ payment at the end of the forbearance.

Neither do I know whether these offers are going to homeowners with federally backed loans or whether they are being offered more broadly.

I suspect the offers are made in good faith and on the spur of the moment.   However, I’m fearful about the lender’s plans (or lack of plans) for what happens after forbearance.

Details to follow

Obviously, the CARES Act was cobbled together quickly in the face of emergency. It surely won’t be the last word from Congress on getting homeowners through this crisis.

Watch for the next round of remedies, and  raise your voice for a fair, enforceable, efficient process to preserve homeownership in a time of pandemic.

More on our coronavirus page

Chapter 13 Bankruptcy Disrupted by Coronavirus

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chapter 13 case

Has your Chapter 13 bankruptcy case been turned upside down by coronavirus?

You are not alone.

And attorneys, trustees and judges are all working on adaptations and adjustments that will save pending cases.

Practices and procedures in Chapter 13 vary widely around the country.  What follows is what I see here in the Bay Area and hear from around the country.

Congress takes Chapter 13 action

The CARES Act, passed by Congress on March 27, extends the allowable length of confirmed Chapter 13 plans to seven years. Currently, plans cannot run more than five years.

That presents a problem if your case is driven by the value of your assets or the need to cure mortgage arrears or pay off a car loan.

To qualify for the extended plan duration, the need for a modification of the plan must be traceable to the COVID-19 national emergency, directly or indirectly.

Importantly, only the debtor can move to extend the duration of the plan.  That means that neither the Chapter 13 trustee nor creditors can move to lock you into a longer plan.

So, there’s new flexibility if you have a Chapter 13 plan that was confirmed before March 27, 2020.

Unconfirmed Chapter 13 plans

Suppose, though, that you’ve filed Chapter 13 and the means test “says” you need to pay something to unsecured creditors.  Only the virus emergency says that income is no longer there.

Current law allows the amendment of Chapter 13 plans that haven’t been confirmed to be amended.  I don’t anticipate any judicial resistance to new income and expense schedules that reflect today’s realities.

If your plan payments are driven, not by income, but by the value of your assets, the problem is harder.  The CARES Act provides no relief from the “best interests of creditors” test requiring that creditor get what they would have had you filed a Chapter 7 liquidation case.

If your assets have fallen in value, it may pay to consider dismissing the current case and filing one where today’s asset values control.

Inability to make Chapter 13 payments

Confirmed or unconfirmed, debtors nationwide find themselves suddenly without meaningful income.

Hardship discharges may become easier

The good news is that many others are in the same boat.

In other times, failure to make a monthly payment would trigger a motion to dismiss your case.

Probably, such motions are far less likely in these circumstances.

Plans, confirmed or unconfirmed, can be modified by the appropriate filing in bankruptcy court.

The practical problem is how does anyone reliably project their income going forward.

I see this as an issue that remains to be worked out among all the players.  The courts don’t want to dismiss a heap of cases, only to have to process refiled cases by the same debtors.  I expect there will be accommodations.

For the moment, both courts and trustees’ offices are operating with skeleton crews and no real appetite to toss people out of bankruptcy for non-payment.

Stay tuned.

Rescue payments excluded from income

The amended Bankruptcy Code definition of income now excludes payments made under federal law relating to the pandemic emergency.

This change benefits both those with unconfirmed Chapter 13 cases, and those who file new bankruptcies in the next year.  Governmental help will functionally not be available to your creditors in a bankruptcy case.

Bankruptcy law will revert to the current definitions of “current monthly income” and “disposable monthly income” at the end of a year’s time.

Challenges ahead

Our current economic catastrophe is unprecedented in its suddenness and its scope.  Lots of good minds (and a few not-so-good minds) are pondering work-arounds for family finances.

In the meantime, stay healthy, stay home, and stay strong.  We’ll keep posting as developments appear.

More

See our roundup of posts on the virus and your budget

 

 

 

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