Forbearances – What are They? And What do They Mean for the Market?

As part of the CARES ACT, you saw a lot of homeowners take advantage of the 3 month… and now 6, and potentially 9 month…. forbearances, that their mortgage companies offered.  A forbearance is a loss mitigation option that a lender uses, to temporarily postpone mortgage payments on a loan, to help the borrower get back on their feet and with the anticipation of them being able to afford the payments again later on.  

This was MY definition.  And you’ll notice – the 2nd piece. 

“With the anticipation of them being able to afford the payments again later on.”  

This becomes KEY.  

In a traditional forbearance, there is a loss of income temporarily due to an event (medical, death in the family, hospitalization, disease, etc) and the anticipation is that the borrower will get back to their payments within a certain amount of time, when the sickness / tragedy / temporary situation is resolved and they are able to return to their jobs at the same salaries.

In comes COVID-19.  

And the base thesis here, is that businesses have learned to do MORE, with LESS.

Less office space, less dues and subscriptions, less monthly obligations, and LESS STAFF.  

This is a normal path during any market event, such as say, a global pandemic.  

The challenge was, the government, in their quest for immediate relief and not having anyone really think about the consequences of their actions, pushed a lot of these options out onto borrowers along with $600/month added incentives for being unemployed (that alone pushed a LOT of people to file and quit their jobs – especially in the hospitality and medical fields, where they could make MORE by being at home, and subjecting themselves to less risk!), along with the PPP loans and the SBA EDIL Loans (where there was rampant fraud that went relatively unchecked by the governing agencies).  

So, in essence, they may have helped temporarily, but here’s how the can looks as it rolls down the road.

We just hosted a webinar where we highlighted the risks of this strategy with my partner Maryann, who runs the Short Sale Mitigation team, where we assist struggling borrowers with getting out from underneath their debt they cannot service.  Check out the webinar recording and take a look at the statistics at the beginning, of the unemployment rates, coupled with the forbearances coming due (and then falling away, without being cured), and ultimately the GAP of the borrowers who, despite their attempts, still will either no longer have a job or will have drastically reduced income when these forbearances finally are coming due.

And they’ll have a few options:

1.  Mr. Borrower, it’s been about 6 months now, and so we wanted to reach out and find out how you’d like to bring your loan current?  (I assume you have some fantastic job now and have escrowed all 6 months of payments and can just pay it all now in one lump sum?)

“Of course not – my income still isn’t the same as when COVID-19 hit!”

2.  OK then Mr. Borrower – then in that case, we’ll take the 6 months of payments you owe, and amortize them over the next 24 months, which should only increase your monthly payments by about $400-500 a month.  How does that sound?

“I can’t even afford my regular monthly payment – and you’re asking me to come up with an extra $400-500?  No can do!”

3.  I see, Mr. Borrower – so in that case, we can amortize what you owe into the 26 years (or 28) years left in your amortization schedule, so it will only increase your payment by $100-200/month – that sounding better?

“You’re not listening – I can’t even come up with my original mortgage payment!  Are you deaf or just not listening??”

4.  Well then you’re in luck, Mr. Borrower, since you can prove a hardship and cannot amortize your payments over 12 or 24 months, and you have a house in MA,  you may qualify under Ch. 65 to get these payments lopped on to the back of your loan, and you don’t have to pay any of it now!  You just have to fill out this 5 lbs of paperwork to show you qualify, and then you can go back to paying your monthly mortgage payment as before….

“Sounds like good news, for someone who has their job back.  That’s not me.  I can’t afford my monthly obligation.  So – not sure what to tell you, Mr. Lender.”

5.  Mr. Borrower, the only other option I see, is that we’ll have to call the loan due and you will be forced to refinance or sell the asset.  

“No shit!  Thanks for the revelation, Sherlock!” or “That’s sad to hear – I’ll call an agent, I don’t want to have to deal with you ever again.”

…or, something that’s not as nice as EITHER of those, above.

You see the issue is lack of income.  Which is still SUPER prevalent in this market.  At the beginning of October, we were at 7.9% unemployment rate.  And, in first week of October, the unemployment claims ROSE 9.5% from the previous week (again – see the stats in the presentation link above).  None of these people can afford to pay their normal monthly obligations, nevermind with any extra tacked onto it.

This will lead to eventual forced sale of these homes.  Now, at first, because demand is still at an all time high in most communities – that first wave?  Should be no problem.  The homeowners make money with a ton of equity, and a bunch of homes are pushed onto the market and helps eat up a lot of the demand that has been festering since the summer.  

The problem comes from the 2nd and 3rd waves – those who got extensions on their forbearances, OR those who were waiting for their lenders to take actions to foreclose.  

The 2nd wave might even be OK, and come out at what they owe.  But see, now more and more homes have been hitting the market.  And less and less maintenance on these homes, push some below the equity line.

So days on market starts to finally go back up to 30, and then 60 days for supply/demand stabilization. THEN once homes start to go on the market for less than what the seller owes, due to inability to keep up with maintenance, or just to get offers in before foreclosure auction dates are set… the market doesn’t just start to correct with price declines.  INVESTORS then come out of the woodwork, who’ve been patiently waiting for values to stabilize, and when they see listings “Subject to 3rd Party Approval” and “Sold AS IS” – their offers drop faster than a lady’s purse on prom night.  (Kid friendly blog!).  

THIS is when we start to see the massive correction we’ve been waiting for.  And … since once again I’m putting my thesis out there for all to see, I would guess we’ll start to see these effects finally in early 2022, when waves start to finally come out and equalize the supply / demand curve.  

Am I right?  Who knows?  But we are preparing, and will take a serious look at our buying criteria come to Q3 and Q4 of 2021.  

Other side effects – availability of capital to buy – just like in 2008 -2010, expect it to be a lot harder to get bank financing.  So those with access to cash, will have the opportunities to help.  Another proud venture we are starting, with more to come in the Q1 update of 2021… but just to let you know, we wouldn’t leave you in the dark with how to prepare, and then how to PROFIT from the market changes!  Announcement coming soon…

“But Nick – what about the elections?”

Funny you should ask – Wall Street’s reactions said it all.  On the day prior, and day of the election – typically when Americans are the LEAST certain about policies and what was to come, the market was stable and even RALLIED.  This means – and this is not necessarily a political statement – that the American people didn’t CARE one way or another about the outcome.  Interesting, right??  This was my major in school, so as an observer to the process, it seemed that voters and the American investors, felt that moving forward DESPITE our President, was more important and they had faith in the economy.  I guess we’ll see!

“But Nick – I wanted to know about COMMERCIAL Real Estate.”

Oh – you’re asking about commercial?  That’s a whole separate article!   Keep on reading – and thanks for staying connected as we adapt and help bring you and us through this incredibly fun roller coaster ride.