WSJ: Soto Weighs Relief for U.S. Homeowners Facing Balloon Payments

May 1, 2020
In The News

WASHINGTON—Lawmakers are considering ways to provide more relief for millions of homeowners who have taken advantage of a government offer to suspend mortgage payments amid the coronavirus pandemic.

The coronavirus-relief package signed into law last month allows homeowners with federally guaranteed mortgages to suspend payments for as long as a year without penalty. But it doesn’t specify what happens after that so-called forbearance period ends, leading some mortgage companies to warn borrowers they will have to make lump-sum payments.

A group of Democratic legislators introduced a bill this week requiring mortgage companies to extend the term of home loans that go into forbearance by the duration of the forbearance period. For example, homeowners who get a year’s forbearance would be able to tack on an extra year of payments at the end of their mortgage.

“There’s still personal responsibility and accountability to the homeowner, while nonetheless giving them a reprieve from a pandemic that wasn’t their fault,” said Rep. Darren Soto (D., Fla.), who is one of nine co-sponsors of the bill. He said he is hopeful the legislation will get bipartisan support and could be included in a future round of coronavirus relief.

Republican Rep. Tom Reed of New York, who serves with Mr. Soto in the bipartisan Problem Solvers Caucus in the House, said any legislation should include a requirement that homeowners seeking forbearance demonstrate financial hardship. But he hasn’t endorsed the proposal for additional relief, raising concerns about potential unintended consequences.

“We have to identify solutions that give American families temporary relief without inducing major liquidity shocks for mortgage servicers and financial markets at large,” Mr. Reed said in a statement.

Outright mortgage and rent forgiveness—an idea floated by Reps. Ilhan Omar of Minnesota, Alexandria Ocasio-Cortez of New York and other progressive Democrats—“is simply not an option,” Mr. Reed said.

Mortgage companies say they face a severe cash crunch as a result of the forbearance offer in the stimulus law. The servicers collect payments from borrowers and pass them onto investors in the mortgages. If homeowners suspend payments, the companies are still on the hook to pay investors.

As of Thursday last week, more than 3.4 million people had suspended payments, representing about $754 billion of unpaid principal, according to Black Knight, a mortgage-data and technology firm.

The Federal Housing Finance Agency said last week it will cap at four months the amount of time mortgage servicers have to make payments on behalf of homeowners in forbearance. The agency oversees Fannie Mae and Freddie Mac, the government-linked companies that buy mortgages from servicers and package them into securities to be sold to investors. They also guarantee the mortgages.

As homeowners continue to report that mortgage servicers are pressuring them to agree to balloon payments in exchange for forbearance, the FHFA put out a press release Monday “to combat ongoing misinformation.”

Director Mark Calabria said in the release that “no lump-sum payment is required at the end of a forbearance period” for mortgages backed by Fannie or Freddie.

“During this national health emergency, no one should be worried about losing their home,” Mr. Calabria added.

But the instructions Fannie and Freddie provide mortgage firms say that paying the total amount due is an option for borrowers who “are able to afford it.”

It’s unclear who determines the borrower’s ability to make payments—the mortgage firm or the borrower. It’s also unclear what happens if there is a disagreement on that issue, said Andrew Jakabovics, vice president for policy development at nonprofit Enterprise Community Partners.

Some policy makers say the slow recovery that followed the 2007-09 recession underscores the need for a more aggressive effort to protect the economy from long-lasting damage from the pandemic.

“It doesn’t seem fair that people should lose everything they have, including their homes, over this,” Federal Reserve Chairman Jerome Powell said in a press conference Wednesday. “It is important that we do everything we can to avoid that longer-run damage.”