Right after Covid-19 forced everyone into lockdown and the federal government pushed interest rates down to record lows, I dove into the world of mortgage refinancing to gain perspective on how beneficial refinancing actually was. Staying in the mortgage arena, today I wanted to tackle forbearance.
To set the stage, everything I’m about to discuss regarding the government’s forbearance program comes from my own first-hand experience participating in the program. When Covid-19 hit, my wife was on maternity leave from a major corporation that still does not offer paid maternity leave. To compound that, the company went through a major layoff in the middle of her leave that basically eliminated her whole team, so we were anticipating that when she returned to work on May 10th that she was probably going to be laid off as well. Then we factored in that my income right now is inconsistent while we invest everything earned back into growing FonHome. This made the forbearance program attractive to us, especially with the government’s promise that it would have absolutely no negative impact. We tried to do as much due diligence as possible, but with the program being put together on the fly by the government, it was difficult to rely on information that was available as everything was still a moving target. But knowing we also wanted to get out of New Jersey, if given the opportunity, we assumed the risk would be minimal because we would just pay off the mortgage when we sold the house. So we jumped in and began participating in the forbearance program starting with our payment due in April. Here is the good, the bad, and the ugly of what we learned through our participation.
First, I think it is legitimate to applaud our federal government for conceiving and approving a plan like this given the time we were and are currently in. Never before seen circumstances require solutions never before thought of. I also feel that their intention for the program to have no negative effect was genuine and the framework of the plan I believe validates that. However, given the compressed timeframe in which this program was rolled out, there was no way they would be able to brainstorm every possible scenario that could arise and how to counter it. This is where our experience turned sour.
Everything played out as we anticipated, Diana returned to work and was immediately laid-off. She was fortunate though and was able to quickly find a new position in Georgia. We put our home in Jersey up for sale and began searching for a new home in Georgia. Our problems began when we went to obtain a loan commitment to purchase our new home. This was when we realized that “no negative impact” actually meant the exact opposite. The kicker is the federal government is not necessarily at fault. The banks managed to find a loophole and worked to ensure we were absolutely negatively impacted because we took advantage of the forbearance program.
When we went to apply for pre-approval, it wasn’t mentioned by this particular bank that our current loan being in forbearance would be a problem and with us in the mindset that the current mortgage would be paid off in full when we closed on the sale of our current house, we didn’t think to mention it as “no negative impact” was our thinking. So we obtained the pre-approval, found a home, and obtained an accepted offer. It wasn’t until now when we needed to begin the full underwriting and loan commitment process that the negative impacts began to pile up. The first was when the bank ran our credit reports. They informed us that our credit reports stated our current mortgage was in forbearance. My immediate reaction had three parts: “So what, we aren’t supposed to suffer any negative effects,” “Because of that, why is it on my credit report,” and “No matter on either of those, because we close on our current house in two weeks and the loan will be fully paid off anyway.” So no issues, right? Wrong!! The bank didn’t see it that way. Their stance was before we can consider your application on the new property, you must pay all the payments we had put off as part of the forbearance program and bring the loan current. Then provide a letter from our current lender that we had paid all balances and are no longer in forbearance. My first question to the bank was “How does the sale of my current home and the payoff of the loan in full not satisfy that?” The bank’s response was simply that they couldn’t consider my application while my current loan was in forbearance. My next question was “Based on that, if I wait until the day after I close on my current home to apply for this mortgage then technically there is no outstanding loan and, therefore, no forbearance, so I avoid the issue, right?” Again, the bank didn’t see it my way. Their response was that if I don’t bring the loan current prior to closing it, then the forbearance will stay on my credit report for 12 months and I won’t be able to get a new mortgage until that time has elapsed and the forbearance falls off my credit report. Again I ask, how is that not a negative impact?
At this point, I decided to take a step back and gather myself. After about four bourbons (on the rocks, of course) it hit me why the banks were taking this hardline. They understand that the median tenure of a mortgage over the last two decades is only six years. That means that the monthly mortgage payment for most of America is 60% - 80% interest. Interest is, of course, the profit banks make from giving you a mortgage, and the first several years of payments are heavily weighted towards interest versus principal.
So to summarize, banks have taken advantage of loose language in a hastily designed federal government program where the intent was to protect the general public and instead ignored the edict of “no negative impact” and manipulated it to ensure they get their money.
I know there are some of you pro-bank, and pro-capitalism people reading this right now who don’t see anything wrong with the bank’s approach and are saying to themselves isn’t it the bank’s right to make sure they are fairly compensated for lending me hundreds of thousands of dollars to live in my home. Ordinarily, I would agree with you. But at the height of the lockdown with more than 23 million people unemployed and the government trying to find any way possible to stop the bleeding, this is simply large corporations being tone-deaf.
My wife and I were basically backed into a corner. In order to move forward, we had no choice but to go into our savings and pay to bring the loan out of forbearance. Diana and I were essentially penalized for evaluating our situation and trying to make the best financial decision for our family.
Hopefully, my story helps someone out there reading this understand the situation they have inadvertently put themselves into when they thought they were being fiscally responsible and took advantage of tools the federal government provided to help stem the tide of a very trying time. Maybe this article will come across a member of the federal government’s social media account and help them understand how banks are manipulating a well-intended program to negatively impact the very people it was designed to protect and the very people who not too long ago were bailing out these same banks because of their poor financial decisions!
Todd Wilkinson is the Founder and Owner of FonHome Realty. FonHome is a customer-centric brokerage where our clients are in control and our experienced agents are respected for providing the positive and exciting experience the real estate transaction should be. Todd is an accomplished real estate investor with an undergraduate degree in Financial Economics and a Masters’s degree in Business Administration. Todd has held senior management and executive-level positions with the world’s two largest retailers and a successful startup venture. Todd has served terms on the University of Arkansas Advisory Board and is actively involved with the St. Theresa School in Kenilworth. Todd opened his own brokerage after feeling underserved in his personal experiences with real estate transactions and wanted a firm whose mission was on serving the fiduciary responsibilities guaranteed to the Buyer and Seller. Contact Todd today for a free Comparable Market Analysis for your home or for advice on beginning your search for a new home at www.fonhomerealty.com.