Four Ways to Forbearance Fraud
During the foreclosure crisis of 2008, mortgage servicers used every kind of trick to avoid giving borrowers a modification. Faxes and applications would be lost, “packets” would have to be redone and resubmitted and promises were never put in writing. After enough delays, or failed modifications and resubmissions, a borrowers’ default would become so great that no mortgage assistance would apply. A similar thing is happening now with forbearance provisions under the Cares Act.1
When the pandemic first struck, the mortgage servicers could be forgiven for being caught off guard, but this went on for months. Borrowers calling their mortgage servicers for assistance were told “we don’t have the forms yet,” or nobody was answering the phone at all. Six, then eight months went by without any direction and missed payments building up.
The reasons why mortgage servicers prefer foreclosure to repayment are discussed elsewhere on my blogs and videos. See in particular Six Servicer Tricks. Delay is the most tried and true of these tactics and the mass confusion of the pandemic has been a windfall for servicers to benefit from foreclosure. As borrowers uncomfortably relied on vague promise of forbearance without any idea what that would look like or whether they even qualified, the servicers have been counting their future profits.
Bait and Switch
Forbearance is a traditional concept in mortgage lending whereby lenders grant borrowers with personal hardship a brief period (usually 3 months) of relief from mortgage payments which then are added to the end of their mortgage. Under the CARES ACT, this traditional forbearance agreement has only been available to borrowers with a Federal Housing Administration (FHA) mortgage who were current as of March 1, 2020 and has been available for only up to one year.2 This is a true forbearance because borrowers get a stand-alone loan that is payable later, either when they sell, pay off their
mortgage, or otherwise terminate it (for example refinance).
1 The Coronavirus Aid, Relief, and Economic Security Act H.R.748, also known as the Cares Act, is a 2.2 trillion economic stimulus passed on 3-27-2020 in response to the economic fallout from the Covid-19 pandemic in the United States. The original CARES Act proposal included $500 billion in direct payments to Americans, $208 billion in loans to major industry, and $300 billion in Small Business Administration loans.
2 if you were current as of March 1, 2020, you were entitled to a true forbearance in the form of a). This was originally available for six months’ worth of mortgage payments but was extended for up to a year of forbearance.
The bait and switch tactic comes in with the other forms of “federally-related” mortgages such as Veterans Administration (VA) mortgages. 3 These are “federally-related” because they are federal guarantees on private lender mortgages and here you will be left on your own to negotiate with the private lender. In these negotiations, the lender may use the words “federally related” to trick you into thinking you will be getting a traditional forbearance when you are actually only entitled to a private forbearance agreement which may require you to pay back the missed mortgage payments in a lump sum or over a shortened period of a few months. After being lured into thinking you were getting a
traditional forbearance, you’ll be eventually told that your private lender’s “loss mitigation” options are to sell your property, or have it sold for you which is the exact opposite of a forbearance.
The problem with any kind of mortgage relief from the federal government is that the
government can’t dictate to private banks, but can only to offer incentives. These incentives are often small compared to the big money that foreclosure brings in, which is why it was always so hard in certain situations to get a loan modification and why it is hard now to get a forbearance. Then, as now, mortgage servicers and banks decide who gets what kind of mortgage help and they do so according to what makes financial sense to their bottom line. The confusion for borrowers comes in thinking that there is enforcement behind the CARES Act which in the majority of cases, there isn’t.
The other way that banks confuse people is by letting arrears build up. If you have equity in
your property, your lender will let you miss payments for years at a time. The phone reps from the bank will tell you you’re in a forbearance, but without a signed agreement. They will send you paperwork with options without telling you which options you are entitled to, and you’ll think it’s real because your mortgage statements keep coming and there is no foreclosure notice, but you’ll have no actual agreement. This is happening currently because housing prices are high, but by missing these payments
3 Another type of “federally related” mortgage is a mortgage guaranteed by the Rural Housing Services Section 502 Guaranteed Rural Housing Loan Program which is designed to serve rural residents who have a steady, low or modest income, and yet are unable to obtain adequate housing through conventional financing. These loans enable low and moderate-income rural residents to acquire modestly priced housing for their own use as a residence through the purchase of a new or existing dwelling or the purchase of a new manufactured home. In this variation of the Section 502 program, RHS does not make a loan directly to an eligible borrower, but guarantees a loan made by a commercial lender. lender. This guarantee substantially reduces the risk for lenders, thus encouraging them to make loans to rural residents who have only modest incomes and little collateral.
you are actually spending your equity. When enough of it is spent, you will reach a tipping point where it is profitable for the bank to foreclose and that’s when you will get the foreclosure notice.
Forced into it
Many people continued to work during the pandemic and did not need mortgage assistance.
Nevertheless, offers came from the servicer that forbearance was available, and these letters came with applications. You may have filled out the application just to see if you were eligible. This trick was played on many people that never requested a modification but were manipulated into one.
This is a way for the servicer to gain access to personal financial information they otherwise would not have. It is a way for them to trick you into missing payments that affect your credit and ensure that you were stuck with whatever repayment plan they offer you instead of having the freedom to refinance. It is used to trick you into reliance so that you will spend your money elsewhere, instead of on your mortgage, so that by the time you realize you have to pay back your forbearance in a lump sum,
you can’t do it.
The best advice is never to rely on the bank to be fair with you and never trust anyone that encourages you to not pay your mortgage.