Understanding forbearance
What is forbearance?
Forbearance allows borrowers to postpone their mortgage payments or other loans such as student loans. Lenders give borrowers this time instead of foreclosure and paying for its process. Both the lender and the borrower should come up with a mutual agreement in terms of forbearance. The borrower must disclose the reason for delayed payment, and it should be a reasonable excuse such as a significant illness or a job loss. This issue is very timely, mostly due to the global effects of the pandemic.
It's a mutual benefit.
How can forbearance give mutual benefit to a borrower and a creditor? It is evident for the borrower since forbearance gives them a chance to postpone their payments considering their challenging situation. But how does it benefit a creditor? Sometimes, yes, it helps a loan owner because if they do not grant forbearance, they need to do foreclosure and pay a hefty amount throughout the process. However, some creditors who do not necessarily own the loan will not grant borrower forbearance since they are not subject to financial risk.
Foreclosure in line with forbearance
When we say foreclosure, we talk about the legal process where creditors take the ownership of a mortgaged property because the borrower cannot continue the payments required anymore. Later on, the creditor sells this property for repossession.
How do creditors assess if they will grant forbearance to a borrower?
Let's say Mr. Dane, a borrower, called his creditor today and asks for forbearance. He explained that he lost his job because their company laid-off a massive amount of employees due to the pandemic. He is also their family's breadwinner, so he needs to pay for their daily necessities, albeit losing his job. He has no income at the moment.
The creditor will go on and look at his records. He will check if Mr. Dane has been responsible for his payments. Did he miss a payment? Did Mr. Dane always have a stable job? Is he likely to be employed soon? Creditors will most likely understand the situation and grant Mr. Dane forbearance if he's been responsible enough. However, this is not for borrowers who have missed payments and previous unstable jobs even if they got laid-off recently.
Terms if creditors grant forbearance
Borrowers think that forbearance grants depend on the creditor. From another point of view, it depends on the borrowers and their history. It depends whether they have the potential to regularly pay again as soon as the temporary situation and forbearance lifts. The creditor can decide to give the borrower either a partial reduction or a full reduction depending on how critical the borrower's situation is and how much confidence the creditor has for the borrower to pay or catch up on the payments.
Other instances include:
- Full moratorium. The lender grants this to the borrower on the mortgage payments during the forbearance period.
- Interest payments. The borrower pays interest payments but not a lessened principal.
- Partial interest payments. The borrower pays this and the unpaid portion that leads to negative amortization.
- Lesser interest rates. The lender may grant this momentarily.
