Mortgage lenders, seeking to keep losses low, are asking homebuyers if they plan to seek forbearance due to the current economic crisis, The Wall Street Journal (WSJ) reported.
The language comes in different forms but is generally under something called the “COVID-19 borrower certifications,” intended to ask borrowers to confirm that they're not anticipating changes to their income that would jeopardize the paying-back of the loans, according to WSJ. The notifications inform borrowers that they won't be able to skip a payment until the government backs their loan, and some of them warn of penalties if the contract is breached in this way.
As a part of the CARES Act passed by Congress earlier this year, homeowners unable to meet financial obligations can request up to 12 months of forbearance on federally backed homeowner loans, which allows them to temporarily pause payments and pick them up later.
However, the process of getting the government to back a loan can take days or weeks, according to WSJ.
Lenders are struggling to figure out which borrowers will be able to pay back loans, as the current crisis has muddled the waters; while millions of Americans are behind on debts, the missed payments are not reflected in their credit scores because of the way the stimulus laws protect them, WSJ reported.
The Federal Housing Administration said it would insure loans in forbearance but would also charge the lender a 20 percent fee if the loan goes into foreclosure. That has become an extra caution for lenders, as "You can’t control what customers do after you close," said Esther Phillips, senior vice president of sales at Key Mortgage Services, according to WSJ.
TransUnion, one of the U.S.'s biggest credit bureaus, reported in June that there were over 100 million accounts on a deferred debt payment program from March to May. Because of that, the Federal Reserve Board said the nation's biggest banks could see over $700 billion in loan losses.