How are American homeowners exiting their forbearance plans?

As the share of loans in forbearance continues its slow but steady decline week after week, it appears that fears of a post-forbearance flood of defaults may have been little more than a product of the general panic that followed the onset of the COVID-19 pandemic.

“It hasn’t quite reached the heights that were initially anticipated,” says Matt Tully, vice president of agency affairs at Sagent Lending Technologies. “That number appears to at least have peaked for the moment.”

Tully has been tracking how borrowers have been exiting their forbearance plans and recently wrote about his findings on Sagent’s blog. He found that Americans are leaving forbearance in three primary ways, one of them somewhat baffling.

First, the two most expected exits. From June 22 until August 23, between 10 and 43 percent of borrowers ended forbearance by agreeing to settle their unpaid mortgage balances at the end of their loans, when, for Agency borrowers at least, the forborne amounts become a non-interest bearing lien that gets paid off when the mortgage is refinanced or the home is sold.

This is the simple outcome most consumers and lenders will have had in mind when forbearance first entered public consciousness. The fact that so many Americans are keeping up their end of the bargain speaks to the program’s success.

“It’s working the way it’s supposed to be working,” Tully says. “From a public policy perspective, that’s what you want.”

The second most frequent forbearance exit involves borrowers who were able to erase their unpaid balances with a lump-sum payment. If readers are wondering if the ability to pay all at once is a sign that these borrowers may not have needed forbearance in the first place, they’re not alone. Tully thought the same thing.

“You hear all these things about the savings rate in the United States and how low it is and how the average number of savings is $400. If it really is the case that people can come current with a lump sum, that would imply they’ve got money in the bank,” he says.

While data behind why these lump-sum payments were able to be made doesn’t exist, Tully’s estimation is that homeowners using forbearance simply set aside the money they would have spent on their mortgages and used it to pay their way out, possibly because their employment or financial situations solidified sooner than they had expected. From June 22 until August 23, between 16.5 percent and 24 percent of homeowners exited forbearance using lump-sum payments.

The most frequent way Americans ended their forbearance plans is a head-scratcher: Despite agreeing to forbearance, they kept making their mortgage payments. From June 22 until August 23, between 16 percent and 49 percent of homeowners left forbearance in this manner.

Such a phenomenon begs the question: How can you stay current on your payments while also deferring them? Tully has a few theories.

First, borrowers may have felt compelled to agree to a forbearance plan because of the prevailing uncertainty caused by COVID-19 and the unknown scale of the inevitable recession. Not knowing if they would be employed a week, a month, or three months later, many homeowners may have signed up for forbearance as a low-risk just-in-case.

Other explanations are simple enough. Some borrowers may have accidentally or mistakenly requested forbearance. Others may have requested it and forgotten to turn off their automatic mortgage payments. April was a confusing time.

Tully has also had his eye on the number of homeowners who have been re-entering or extending forbearance. Re-entries comprise a miniscule, percentage of forbearance activity, but extensions saw a sharp rise in late June and early July – the time when most initial, 90-day forbearance periods expired.

It’s not that borrowers are necessarily distressed and need another 90 days to get back on their feet, Tully says, it’s more the result of lenders offering 90-day forbearance rather than the full, CARES Act mandated 180 days as a way of avoiding the colossal servicing burden that would result if all of their clients were to exit forbearance at the same time in October.

“Perhaps people really need it, or that’s what they feel they’re entitled to,” he says. “We’ll see in the coming weeks if people go from the 180 to the full 360 they’re entitled to under the CARES Act.”

As Sagent’s man in D.C., Tully has had a front-row seat for the gridlock that has seized Congress and is preventing the federal government from releasing another batch of COVID-19 assistance. Aside from the usual questions around the size and scope of the next aid package, he’s asking another: When will the COVID-19 emergency be declared over?

“The end of March 2021 will be one year since the CARES Act passed,” he says. “You could theoretically see a scenario where if someone doesn’t plant a flag and say, ‘This is the end of the COVID crisis and we’re returning back to normal,’ people could still be requesting forbearance. This is kind of on auto-pilot until someone definitively declares the crisis is over.”