DOLLAR AND SENSE

Payment forbearance kicks the can down the road getting bigger with every missed payment.

I thought the April 1 headline “Franchot: Working or not, don’t pay your bills just yet” was an April Fool’s joke, but as I read, I realized the Comptroller was dead serious. His suggestion that all Marylanders, working or not, should hoard their cash and ask mortgage lenders, landlords, utility companies, etc. for 90-day forbearance of payments instills more fear in Marylanders. And it will put many people in a world of hurt when the missed payments need to be repaid or made up. I understand and support the idea that those facing financial hardship due to Coronavirus should ask for relief. But for Comptroller Franchot to encourage those who are still working and not confronted with financial trauma to ask for the same relief is financially irresponsible.

Why should those who are still working reap the same benefit as those who are not? What gives those still gainfully employed the right to expect the same benefit when their bellies are full, the expense of a roof over their head taken care of and their health and physical needs taken care of? What valid reason can be given that the employed can ask for relief while their neighbors may be suffering financial devastation?

Comptroller Franchot makes it all sound so easy to ask for forbearance, and for those with FHA, VA, Fannie Mae or Freddie Mac mortgages it actually is. You can be granted 90 days basically just for asking with the condition that you are suffering in some way because of Coronavirus. But forbearance is not forgiveness.

Not making a payment in any given month, without late payment penalties does not relieve you of responsibility of repaying that amount at some point. You need to understand when being granted payment forbearance of exactly when you will be expected to repay the missed payments.

Most lenders would like to collect the unpaid balance upon the end of the forbearance period. This is the absolute worst way to have to repay because the total of all the unpaid payments comes due at one time, at the end of the forbearance period. If you follow the Comptrollers suggestion you would have to come up with three payments at one time, or immediately be delinquent for the unpaid balance, which also could put you in default and the lender could technically foreclose, repossess, or send the account to collections. Some relief, Huh?

A more popular way of forbearing payments is to just add the unpaid payments to the end of the loan. No need to worry about coming up with a large chunk of money as you would if you had to make the payments all at one time. But depending on how long you have had your mortgage, the unpaid interest on the payments missed compounds so that three missed payments could add 4- 6 months or more to the end of the loan.

Another “Gotcha” of not making payments on a mortgage happens if you are escrowing for property taxes and insurance. Not making three mortgage payments means your escrow account will be three months short. Be prepared in September or October to find out that you need to make up a shortage that, depending on your monthly escrow, could be as much as $1,000 or more.

Landlords are in a different position than mortgage lenders. Landlords need tenants to pay rent so they can pay their mortgage payments, taxes, and insurance. If the tenant does not pay rent the landlord will either have to come up with funds from other resources or ask their lender/mortgage holder to grant them a forbearance of payments ,and the cycle repeats itself each month that rent is not paid.

If the landlord evicts the tenant in today’s depression economy, they will need to find another tenant to replace them. Not an easy task where 22 million people filed for unemployment in the last four weeks.

Regardless of which type of loan you are requesting forbearance on, you will be expected to pay it back. Payment forgiveness is the only way you are absolved of making the payment and you are not liable for paying anything back. You must fully understand the terms of repayment of the unpaid balance. If you are unable to repay the unpaid amount you will be considered in default of the loan and the lender will move for foreclosure or repossession. Making a bad situation so much worse.

For Comptroller Franchot to suggest merely days after POTUS Trump signed the Care Act into law, the most expensive social spending program in the history of our country, that everyone, working or not, ask for three months of payment relief when trillions of dollars is being committed for individual relief, is troubling. The Federal government is providing $600 per week or $15 per hour in addition to unemployment benefits provided by the state of $200-$300 per week. Many on unemployment will be making as much as $20 per hour while not working.

If the economy opens up before the $600 federal unemployment checks stop at the end of July, some employers who were counting on their employees returning to work will find themselves competing with unemployment benefits instead of other employers. I know this sounds screwy but as POTUS Trump pushes hard against Governors to relax social distancing for the sake of jobs the collateral damage will be the jobs he wants people to return to. “Get America Working Again” … as soon as the $600 per stops the end of July! Why would someone give up $15 per hour in unemployment benefit to make $13.50 at their previous job?

Congress and POTUS Trump have found common ground in Coronavirus; ground that is fertile for growing government spending to support those who have suffered the most in our capitalist economy, small businesses and the unemployed. The CARE Act will serve as the safety net on which businesses and individuals will be able to save themselves from imminent financial ruin. Billions and billions of dollars will find their way into the accounts of small business owners and individuals so they can be ready to return to normal activities. But who can envision what the “new normal “will look like?

If Comptroller Franchot’s recommendation is followed and everyone stops making payments to those whom they are indebted there will be nothing normal about the “new normal”. We will have a whole class of citizens playing “catch up” that will hinder their ability to “Move On’.

We have been forced to remain in our homes, only coming out for the most basic of needs, unless we are considered “essential” to the health and safety or our fellow citizens. We have learned to exist in a virtual world where the benefit of human contact is filtered through a screen. “6 feet” has become ingrained in our psyche like facemasks, hand sanitizer and soap.

“Excuse me do you mind moving back” is not so much a request any more than it is a demand upon those whom we are not familiar. We fear that some stranger who does not show symptoms but is infected gets inside our 6-foot safe zone and is the contact that pushes us into two week “self-isolation” where we prepare for the onset of symptoms… or not.

Payment forbearance merely kicks the can down the road and the can gets bigger with every missed payment, so that at the end of the road the full can, or accumulated balance must be repaid. Forbearance does not eliminate the requirement of making a payment. It allows you to make it later, with accumulated interest.

Forbearance requires the borrower to repay the accumulation of missed payments at one time or adds payments to the end of the loan. In either case you are paying it back. The challenge going forward will be for those who have benefited from forbearance having the ability to repay the unpaid balance when the economy recovers.

At worst, if absolutely necessary, ask for forbearance. At best, continue to make your payments as agreed. But at the very least, make every effort to pay the interest owed on your balance to avoid having the outstanding balance grow. And if necessary, come to an agreed upon payment plan with the creditor. If you need forbearance, only ask for it as long as you need it. Do not ask for a blanket three-month reprieve.

Think of payment forbearance as a month to month event. If you already have been granted three months and you can afford to make your payments, make them. If you are lucky enough to be receiving unemployment and the stimulus check, consider at least contacting your creditors and arranging to at least pay the interest due.

Mr. Rowe is Vice President/Lending for Bay Capital Mortgage Corp. with offices in Easton and Annapolis. He has lived in Caroline for his entire life and supports the county by volunteering in a variety of ways. He currently lives near Greensboro with his wife Jeanne and daughter Kelsey.