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March 31, 2020
We’re living through unprecedented times. With the pandemic starting to rear its ugly head in our country, we’ve already seen economic disruption, and are bracing for much more. In an effort to mitigate the damages, our federal government passed a financial relief bill that addresses both individuals and small businesses impacted by COVID-19. CARE ACT
So today I want to talk to you about how that relief package is affecting the homeowners and the housing market, and what some of your options are as we as a nation face a difficult economic situation.
Before anything else, the MOST IMPORTANT thing I can tell you right now is that if you are under financial distress as a direct result of COVID 19 and cannot pay your mortgage, you have to contact your mortgage servicing company. This federal relief act does not mean that your mortgage payments automatically stop. It simply enables you as a homeowner to apply for relief and be protected from financial hardship as it relates to your mortgage.
As an overview, this bill puts a halt on all evictions and foreclosures for a period of 60 days. There is already talk of extending this period, but as of this writing, this halt extends through May 2020. So, if you find yourself in a COVID 19 related financial hardship, this bill gives you 60 days to figure out your next steps as it relates to your mortgage.
The forbearance part of this act means that there is a hold on evictions and foreclosures. If you are financially impacted by COVID 19, you have a period of time that you are not required to make payments. Then when that grace period is up (in this case, two months), you will have to make both your regularly scheduled payments, and make up for the payments that would have occurred during the grace period. Depending on your circumstances, you will either have to pay that amount up front, or you will make modified payments along with your regular payments.
Deferment programs are slightly different in that whatever payments would have been made during the deferment period are simply tacked on at the end of your loan term, and they still accrue interest as they normally would. This is really similar to the way student loans work. The thing to note here is that you have to be able to prove that this is a COVID 19 related hardship, and the deferment period (for now) is only 180 days. So if you had job loss prior to the pandemic, it does not qualify. At the current moment, only Fannie Mae and Freddie Mac have issued guidelines on deferments, but I do anticipate more to come in the weeks ahead.
So in summary, the CARES Act impacts the housing market by injecting liquidity (in the form of direct payments to tax payers- read more on that HERE, halting evictions and foreclosures, and offering deferments to those in need.
This is a hefy topic, but I’m going to do an extremely simplified overview as it relates to what’s going on right now.
Once a home loan is closed, it is transferred and managed by a mortgage servicer (the bank you make your payments to). The asset (closed loan) itself is sold to investors or a government agency like Fannie Mae, Freddie Mac, or Ginnie Mae (FHA/VA). The servicer’s role is extremely important because they collect payments from the borrowers and pay property tax insurance and handle customer service related questions/issues. They are also responsible for timely payment to investors (in this case, the government) who buy pools of these loans through investments called Mortgage Backed Securities (MBS).
The reason it’s important to understand this right now is because the CARES Act does not provide relief or guidance for Servicing companies. Which means that if a homeowner stops paying their mortgage, the service provider is STILL on the hook to pay the investor (the government). This is why it is SO IMPORTANT for people to continue paying their mortgage if they are still employed. It was this exact problem that contributed to the housing crisis in 2008. People who still had an ability to pay stopped, and then servicing companies were not able to fulfill their obligations to investors.
I know this is not going to be the popular opinion, but I truly believe that if you have equity in your home, and you are in a position (for whatever reason) where you can no longer afford your mortgage, you should sell. That way you can figure out housing that is within your budget (which may be dramatically different now), pay off your debt, and still have assets left. This will leave you in a stronger financial position on the other side of this, rather than deeper in debt.
Also, for those of you who find yourself suddenly unemployed, and don’t know what to do next, I really believe that there is serious value in work, and there is work to be found right now. So many groceries are hiring, and delivery services too. Obviously, I don’t want anyone to put themselves or their families at risk. But if it is a possibility for you, don’t feel bad for stepping away from whatever your chosen work was to do something in the interim. It may not be what you want to do with your time, but, if the choice is giving up or doing an honest day’s work, DO THE WORK. We all need to do what we can to help pull ourselves and our communities out of this.
In closing, please stay safe out there. Stay healthy, and be well. We WILL get through this, and as always, if there are any questions I can help answer for you, please don’t hesitate to reach out.
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