What Will Happen When Forbearance Ends?

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The mortgage forbearance offered by the government, starting with the CARES Act, was a godsend for millions of homeowners during the pandemic. But when it expires, a significant number might still be in financial trouble, especially lower income borrowers, according to a new report from the Federal Reserve Bank of New York. 

Key Takeaways

  • Millions have avoided financial disaster during the pandemic thanks to government-mandated mortgage forbearance, which allows homeowners to skip payments or make reduced ones.
  • But many households could still be in financial trouble once forbearance ends after a maximum of 18 months—mostly borrowers with poor credit and those living in low-income neighborhoods.
  • The scale of mortgage delinquencies then is likely to be well above pre-pandemic levels, but well below what it was during the Great Recession.

Since it was first offered in March 2020, about 6.1 million borrowers have at some point taken advantage of forbearance, which is an option to stop making mortgage payments, or to make reduced payments for a period of time, without hurting the borrower’s credit. As of March 2021, about 2.2 million remained in forbearance, and when borrowers run out of time on their forbearance plans (a maximum of 18 months after they first took the option), a significant number of them could be seriously behind on their payments. The 18 months will be up in September for those who went into forbearance at the earliest opportunity.

By one “pessimistic” estimate by Fed researchers, the number behind on their payments after exiting forbearance could be as high as 3.8% of all borrowers—significantly higher than the 0.9% currently delinquent and the 1.3% that were delinquent before the pandemic, but well below the 6.3% delinquency rate among homeowners in 2010 after the housing crash. The borrowers most likely to still be in forbearance are those with poor credit ratings and those who live in low-income areas, New York Fed economists said Wednesday.

“There is certainly a substantial number of households who are still benefiting from the provision of mortgage forbearance,” said Andrea Priest, head of external communications at the New York Fed in a webinar on Wednesday. “I think that we would anticipate that those households might face a little more hardship when these programs end.” 

When the pandemic hit, throwing 22 million people out of work, the government offered homeowners a lifeline that had previously only been available during natural disasters: Borrowers with home loans backed by Fannie Mae, Freddie Mac, or several other federal agencies could enter forbearance for up to a year, later extended to 18 months, usually making up any missed payments at the end of the loan. The government also made it easier for private banks to offer forbearance and loan modifications. 

Borrowers who live in low-income areas and those with poor credit scores were the most likely to enter forbearance in the first place, and were the most likely to still be in it in March, according to the New York Fed analysis, which was based on data from its Consumer Credit Panel. (The data does not show individual incomes, so Fed economists analyzed the data by ZIP code.) 

Among the quarter of households in the lowest income areas, 16% entered forbearance at some point and 6% were still in it in March, while among the highest quarter of households by neighborhood income, 11% had entered at some point and 3% were still there in March. And by credit rating, 29% of borrowers with scores of 620 or lower had entered forbearance and 16% were still there in March, whereas for borrowers with credit scores of 760 or better, 8% had gone into forbearance and only 2% were still in it.

The widespread use of forbearance options has made the housing market in the pandemic’s economic downturn far different from the Great Recession, when nearly 12 million people faced foreclosure. This time, foreclosures have all but stopped. But as the New York Fed analysis shows, there could still be significant delinquencies after the protections end.