It has never been a more lucrative time to refinance. Amidst the global health crisis caused by the outbreak of COVID-19, refinance mortgage rates are near record lows resulting in an influx of mortgage applications in an effort by borrowers to take advantage of lower rate opportunities.
But for many, refinancing hasn’t been an option. Global economies were not fully prepared for a pandemic of this magnitude.
The United States specifically, took action to limit household exposure to the deadly virus by shutting down businesses, schools, and public services nationwide. As closures impacted economic activity, it caused disruptions to the livelihood of consumers.
In a rush to provide relief to households the federal government rolled out the CARES act, which allowed households affected by the COVID-19 crisis, either directly or indirectly, to apply and receive forbearance on federally backed mortgage loans.
However, this impacted the salability of mortgages loans into the secondary market. Aggregators Fannie Mae and Freddie Mac initially deemed mortgages in forbearance to lack investment quality, determining that those loans were not eligible for purchase.
This ruling has created a barrier, preventing nearly 4 million homeowners who have received relief from taking advantage of the lower rate environment1.
However, recent changes announced jointly by Fannie Mae and Freddie Mac have produced modified requirements regarding the eligibility of mortgage loans in forbearance to be refinanced.
Let’s take a look at how the forbearance relief works as well as what new refinance mortgage eligibility requirements are that you should consider if you are seeking to refinance and your loan is currently in a forbearance status.
Forbearance Under the CARES Act
Forbearance is not a new loss mitigation tool by any means. Lenders have been able to offer forbearance for distressed mortgage loans in the past.
The Consumer Financial Protection Bureau defines forbearance as a state in which your “mortgage servicer, that’s the company that sends your mortgage statement and manages your loan, or lender allows you to pause or reduce your payments for a limited period of time2.”
It’s important to realize that forbearance is not loan forgiveness. Forbearance simply allows you to delay or reduce your obligated payment. After the forbearance payment has ended, your full payment could be reinstated. If you fail to make a payment, there could be additional consequences.
Under the CARES act, borrowers with federally backed mortgages are entitled to receive temporary relief for an initial period of up to 90 days if you are experiencing financial hardships resulting from the COVID-19 emergency1.
The initial period would require servicers and lenders to reduce your monthly payment or drop it to zero. If needed, you can even reapply to extend the period out longer by reaching out to your lender or servicer roughly 30 days prior to the plans expiration1.
The new legislation also stays foreclosure proceedings on federally backed loans for at least 60 days. Borrowers taking advantage of this relief also cannot be negatively reported to the credit bureau as delinquent (although the loan can be reported as being in a forbearance status)1.
New Refinance Mortgage Eligibility Rules
In a recent announcement on May 19, 2020, Fannie Mae and Freddie Mac both have concluded they need to prioritize the needs of homeowners during these difficult economic times. Above all, they want to maintain safety and soundness standards within the housing markets.
Under their new temporary borrower and credit flexibilities, both government-sponsored entities outlined revisions to allow borrowers who have missed payments and entered into loss mitigation programs the ability to refinance or obtain a new purchase mortgage3.
To be eligible, borrowers must have three timely payments on the mortgage in forbearance3. Furthermore, there is no waiting period for borrowers who have missed payments as a result of the hardships brought about by COVID-19, but have since reinstated their loan or brought it current3.
Additional clarification for borrowers that also applied for forbearance but ultimately were able to make their existing repayment schedule work. Those borrowers are also not penalized with a set waiting period3.
The FHFA further, conservator for Fannie Mae and Freddie Mac, testify that both “are now able to buy forborne loans, with note dates on or before June 30, 2020, as long as they are delivered to [them] by August 31, 2020, and where only one mortgage payment has been missed4.”
This announcement is great news for previously down-trodden borrowers who can now take advantage of the low refinance mortgage rate environment that the housing market is currently experience.
Being able to lower their monthly through a refinance can provide both short and long-term relief for U.S. households.
Now the better question is: when should you refinance your mortgage? Do you take advantage of low rates now or wait to see if they go lower?
1 Olick, D. (2020, May 07). Struggling to pay your mortgage? Here’s how to get help. Retrieved July 19, 2020, from https://www.cnbc.com/2020/05/07/4-million-homeowners-in-cares-act-mortgage-forbearance-program.html#:~:text=The relief effort, blocks lenders, or reduce your mortgage payments.
2 CARES Act Mortgage Forbearance: What You Need to Know. (n.d.). Retrieved July 19, 2020, from https://www.consumerfinance.gov/coronavirus/mortgage-and-housing-assistance/cares-act-mortgage-forbearance-what-you-need-know/
3 Press Release. (2020, May 19). Retrieved July 19, 2020, from https://www.fanniemae.com/portal/media/corporate-news/2020/covid-flexibility-refinance-7021.html
4 Get Started Here. (n.d.). Retrieved July 19, 2020, from https://www.fhfa.gov/Media/PublicAffairs/Pages/FHFA-Announces-Refinance-and-Home-Purchase-Eligibility-for-Borrowers-in-Forbearance.aspx