When someone loses their home, it is most often because something else in their life has gone wrong. Ninety-four percent of mortgage defaults occur when a homeowner loses income to extenuating circumstances, such as unemployment, divorce, severe injury or illness, or death of a borrower or coborrower.
Each of these adversities comes with devastating emotional and financial pressures, which are exacerbated when a homeowner is forced to default on their mortgage and risk losing the roof over their head. In these cases, forbearance—or temporarily suspending mortgage payments—could give hard-pressed borrowers room to breathe and potentially keep them from facing foreclosure.
Forbearance was uncommon before the pandemic. Normalizing it could benefit homeowners, communities, and even lenders.
The evidence on forbearance
Data indicate that the forbearance program (PDF) initiated through the Coronavirus Aid, Relief, and Economic Security (CARES) Act during the COVID-19 pandemic likely stopped a large wave of foreclosures that would have resulted from high unemployment.
Eight million households (PDF) took advantage of forbearance. After the forbearance period expired, the rate of foreclosure starts was lower than it had been before the pandemic. This suggests forbearance gave homeowners a cushion against pandemic-related income shocks.
Recent research based on data from the National Mortgage Database (a nationally representative database jointly managed by the Consumer Financial Protection Bureau and the Federal Housing Finance Agency) and from the JPMorgan Chase Institute (on Chase consumers) corroborates evidence that the CARES Act forbearance program prevented foreclosures.
What normalizing forbearance could look like
In our new Urban Institute report, we used evidence from the success of forbearance during the pandemic to inform a plan to expand forbearance in a cost-effective way to prevent tens of thousands of foreclosures a year.
Under the policy, servicers would offer four months of forbearance to borrowers experiencing unemployment, divorce, severe injury or illness, or the death of a coborrower. This policy is simply a limited extension of current policies, which all the servicers have implemented. Thus, the costs of such an extension would be near zero.
Under this forbearance policy, anyone who documented a financially disruptive life event could stop making mortgage payments without going into default and with minimal penalties to their credit score. If the qualifying event were short term, the homeowner could continue with their mortgage as usual after the forbearance term expired. In this case, the payments they did not make would be tacked onto the end of their loan without interest. The homeowner would end up paying the same amount for their mortgage when they could afford to do so. If they could not afford to continue making the same monthly payment as before, they would be considered for a modification to reduce their mortgage payments.
Even if the event drastically changes the homeowner’s financial or social situation to the point that they can no longer keep their home, the breathing room could enable them to sell the home during the forbearance period without taking a serious hit to their credit score.
Note that before the pandemic, the standard treatment for a borrower was to allow them to go seriously delinquent and then explore loss mitigation options, including mortgage modifications and foreclosure alternatives. Under the policy we explore, borrowers would not need to go delinquent before applying for or receiving forbearance.
Every actor with a stake in the mortgage stands to benefit from a forbearance policy. We estimate that if this forbearance plan were implemented and just 5 percent of the homes in forbearance were saved, it would produce a total savings of $2,290 per loan to the borrower and the holder of the credit risk (by avoiding foreclosure) and to the community (by having one less foreclosed home). Even though the credit risk holder incurs all the costs and experiences a fraction of the benefits, they would still be better off by $6 per loan, on average.
What would it take to normalize forbearance?
The government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac, along with the Federal Housing Administration (FHA) and the US Department of Veterans Affairs (VA), make the rulebooks that servicers for most mortgage loans abide by. Before the pandemic, these institutions lacked evidence that such a program would broadly benefit borrowers. Previously, forbearance had been applied on a large scale only to areas suffering from natural disasters, which did not provide much data for the benefits of forbearance when a borrower loses their job. Thanks to the success of the CARES Act forbearance policy, the institutions now have the data.
These entities have the power to make forbearance a regular part of the process for stopping foreclosures. Doing so would be easy; each institution can do so by itself, without needing agreement from any of the other entities or from Congress.
The GSEs, the FHA, and the VA should consider applying the lessons from the pandemic to institute a forbearance program that homeowners can rely on to maintain stability, even when life takes a turn.