Deferred debt stacks up

This story originally reported that 1.5 million homeowners are at least three months behind on their mortgage payments without a forbearance plan. The story has been corrected to note that those homeowners are not in foreclosure.

Only one week after New Orleans enacted a citywide stay-at-home order in March 2020, Laura Landry was hospitalized with COVID-19, putting her out of work. Before she could recover, she was furloughed from her jobs as a nail technician and hotel employee.

When she found out she could enroll in forbearance — a provision that allowed those with federally backed mortgages facing COVID-related hardships to defer their monthly payments — she took the opportunity. But now she owes over $20,000 on her home, and her forbearance ends next month, since the federal ban on foreclosures expired Saturday.

Landry is one of about 1.8 million homeowners still in forbearance as the safety net is removed. About a fifth of them will not be able to extend their forbearance past September. And among all homeowners, 1.5 million are 90 days or more behind on their mortgage payments but not in foreclosure.

Those who aren’t forced out will still be displaced if selling is their only option, and an estimated 1 in 10 borrowers in forbearance will not have enough equity to sell.

And while Congress approved $10 billion in federal assistance to help homeowners pay off debt, the program is moving so slowly that protections are expiring before states have figured out how to distribute the money. In the meantime, the White House announced July 23 that many homeowners with federally backed mortgages may be eligible for a reduction in their monthly mortgage payment.

In New Orleans, the rate of forbearance is higher than in any other major metro area as of July 6, according to Black Knight, a data analytics firm that focuses on real estate. About 7 percent of borrowers are taking advantage of the program, twice the national share of about 3.5 percent. Baton Rouge, about 80 miles northwest of New Orleans, ranked second-highest on forbearance rates.

“For them to allow us to do the forbearance, it was a blessing,” Landry said. “But then when you think you got to make all those payments all at once again eventually, that’s when reality wakes you up.”

While those that remain in forbearance are only a small fraction of the nation’s 53 million estimated total borrowers — and a significantly smaller share than the 7.25 million borrowers that entered forbearance throughout the pandemic — they are the most likely to be left in debt.

“This is just more of the K-shaped recovery,” said Diane Thompson, senior adviser to the acting director of the Consumer Financial Protection Bureau (CFPB). “The ones who are left [in forbearance] are by and large people who aren’t paying, can’t pay and haven’t made payments for a very long time.”

About a third of homeowners were never eligible for forbearance due to having mortgages that weren’t federally backed. (The moratorium applied only to mortgages backed by the Department of Housing and Urban Development, the Department of Veterans Affairs, the Agriculture Department and the Federal Housing Finance Agency.)

Other homeowners may not know about forbearance, or may have received inaccurate information on their eligibility. Even for those in forbearance, mortgage servicers may not be adequately communicating all possible options to homeowners for resolving debt.

“There’s a really big problem with servicers not accurately explaining the post-forbearance options, such as loan modification to permanent deferral, all of those things that are necessary to bring the loan current,” said Sarah Mancini, a staff attorney at the National Consumer Law Center.

Over half a million homeowners had exited forbearance by June 15 but were still delinquent, according to Black Knight data, probably because they reached their maximum allowance of one year. (Some servicers allow forbearance plans of up to 18 months, others 12.) Almost 200,000 of them had not made arrangements with their lenders for repaying the debt or modifying their loan.

A new rule adopted by the CFPB requires mortgage servicers to review an application from homeowners before initiating a foreclosure in 2021, which allows homeowners to explore all possible options for resolving debt, including selling the home, pushing the debt to the end of the loan, or reducing the monthly payment.

But the CFPB’s protections don’t go into effect until Aug. 31. This leaves a month for mortgage servicers to initiate foreclosures on those not in forbearance. An estimated 900,000 homeowners who will exit forbearance by the end of the year will face foreclosure only as a last resort, along with those who aren’t foreclosed on in August.

As homeowners exit forbearance, they may now be considered for monthly payment reductions, depending on who backs their mortgage under new federal measures that “require or encourage” mortgage servicers to offer borrowers these options, according to a White House news release. The reductions could be up to 25 percent in borrower’s principal and interest payments, the main components of a monthly payment. Others may be able to defer the debt to an interest-free loan at the end of the mortgage.

A Washington Post analysis of the Census’s Household Pulse Survey showed that although the percentage of homeowners surveyed who were behind on their mortgage has declined from 7.8 percent at its peak in mid-December to 4.7 percent in early July, the share of delinquent homeowners who experienced a loss of income due to unemployment has increased to 14.5 percent. That number is even higher among those who reported they used money saved from any missed or deferred payments to meet spending needs, at 18.8 percent.

As of July 22, 40 percent of borrowers remaining in forbearance have Federal Housing Administration (FHA) or Veterans Affairs loans, according to Black Knight data. FHA borrowers are typically first-time borrowers, and are more likely to be lower-income, a minority, or live in underserved areas.

Low-income communities and communities of color are among the most impacted, the Bureau found. A May study found that borrowers in majority-Black or -Hispanic communities were more likely to be in forbearance and to be delinquent than those in majority-White communities. Though Black and Hispanic borrowers make up about a fifth of mortgage borrowers, they amount to a third of those in forbearance and just over a quarter of delinquencies. The same was true of low-income census tracks, where over a third of delinquent borrowers were in the lowest quarter of the income bracket.

For some, selling their house may be the only way to resolve debt accumulated over the course of the pandemic. In the current housing market, experts predict that demand for homes will prevent a wave of foreclosures.

“Any homeowner who wanted to sell, not only could sell, they could sell quickly, and probably for more than they bought the home for just given the lack of inventory on the market,” said Mike Fratantoni, senior vice president and chief economist at the Mortgage Banking Association.

This isn’t universally the case, however. Black Knight estimated in February that one in 10 borrowers in forbearance will have less than 10 percent equity in their home, the amount usually needed to sell a house without losing money, by the time they exit forbearance. Among FHA borrowers, one in five were estimated to be in this position.

“After you take into account that they may have these 18 months of payments, and insurance and property tax payments along with it, they’ll have less than 10 percent equity left in their house,” said Chris Herbert, managing director of Harvard’s Joint Center for Housing Studies.

The U.S. Department of Treasury has allocated almost $10 billion to distribute to states and territories to assist struggling homeowners. To be eligible for assistance, homeowners must have experienced a financial hardship after Jan. 21, 2020 and earn 150 percent or less of the state’s median income.

Right now, states are developing plans for distribution of the funds, but the Treasury Department has yet to open its portal for states to submit the plans, according to the Louisiana governor’s office. States learned Wednesday morning that the Saturday deadline to submit their plans , already extended from June 30, was being extended again.

Without their plans approved, states cannot receive more than 10 percent of their funding allocations, intended to assist with planning and developing a pilot program. A Treasury spokesperson said more than $900 million has been distributed to states and territories.

By the time plans are submitted and approved and substantial funds actually reach homeowners, mortgage servicers will have had ample time to initiate foreclosures or demand payment of debt if borrowers do not arrange an alternate loss mitigation plan.

Louisiana’s plan for distribution of its $146 million is “prepared and ready to submit,” according to the governor’s office, and just awaiting guidance from the Department of Treasury on how to submit. It proposes a maximum $10,000 allocation for each eligible homeowner, depending on their financial situation, but no money has reached homeowners.

In the meantime, the city of New Orleans has partnered with Southeast Louisiana Legal Services to offer low-income homeowners aid to pay debt accrued from missed payments, as well as legal support to resolve mortgage disputes once the foreclosure moratorium is lifted. They are reviewing over 65 applications, and anticipate they will have enough funds to help all eligible applicants get current on their mortgage, said Julia Jack, the agency’s Foreclosure Prevention Unit Manager.

Landry is counting on getting a loan modification for when her forbearance expires in September to make her monthly payments more affordable. Since her loan is backed by FHA, she’ll either defer her debt to the end of her mortgage, or extend the total term of the mortgage and reduce the monthly payments.

Wells Fargo, Landry’s servicer, said it is reaching out “early and often” to borrowers to inform them of their options. Carmen Bell, a senior servicing executive at Wells Fargo, said the bank would do “everything possible to work with [Landry] over the next 45 days as her forbearance comes to an end in September.”

Landry is working hard to build up an income to start making regular payments again, even if it means taking extra shifts at her nail tech and hotel jobs, which she’s been able to resume as the country reopened. Otherwise, she’ll have to sell the home she’s lived in for 18 years.

“It was the first house that I was able to purchase on my own, and it has a lot of sentimental value to me,” she said. “I’ve been trying to work somewhere every day. Just as long as I could show that income to build it up to where I can prove that I’m able to pay.”

Chris Alcantara contributed to this report.