Governments and servicers were both quick to launch forbearance programs for over seven million mortgage borrowers during the pandemic, realizing the historic challenge borne out of the Covid-19 pandemic. The fast and efficient response worked – a foreclosure crisis has not materialized, and most experts do not believe there’s a threat of a huge wave of foreclosures in the cards.

But housing experts say a new phase of financial aid needs to be issued imminently to help those who are exiting forbearance and are still struggling to pay their mortgages.

Black Knight data shows that roughly 450,000 forbearance plan expirations are expected to occur through the end of 2021, representing more than a third of active plans.

“We are concerned that we are going to see more and more people in this same position in the coming months: many homebuyers who lost jobs are back to work but making less money,” said Jackie Boies, senior director at Money Management International, a nonprofit that provides credit and debt management counseling. “They’ve had a manageable budget due to mortgage forbearance. Now mortgage forbearances are coming to an end, and many homebuyers will not be able to pay their mortgage again.” 

The unemployment rate checked in at 4.2% in November 2021, down from 14.8% in April 2020, according to the U.S. Department of Labor. Still, some borrowers haven’t regained employment or are now under-employed. 

“Just because there are a lot of jobs out there doesn’t mean there are jobs that are paying as well as they were before the pandemic,” said Stephanie Moulton, professor at the John Glenn College of Public Affairs from the Ohio State University and an expert in public policy implementation.

A $10 billion hope      

The biggest hope for borrowers who can’t pay their mortgages – apart from winning the lottery – is the Homeowners Assistance Fund (HAF) program. A component of the American Rescue Plan Act, it was approved by Congress in March. The fund allocates $10 billion to prevent homeowners from falling behind on their mortgage, losing utility services, or being displaced. 

The money can be used for mortgage payment assistance or mortgage principal or interest rate reductions. It can also cover utility payments, including electric, gas, home energy (firewood and home heating oil), water, and wastewater. 

Homeowners have to document and describe their financial hardship, which has to have occurred after Jan. 21, 2020. They also must have incomes that do not exceed 150% of either the area median income or 100% of the median income for the United States, whichever is greater. According to the latest U.S. Census Bureau data, the median household income in Volusia County, where Wilen lives, is $49,494, so he would be a target. 

States and eligible territories are tasked with administering the money, subject to the U.S. Department of the Treasury approval. Each state must also submit its own HAF plans to the Treasury for approval. As of October, 10% of the funds have been distributed upfront for states to initiate pilot programs. But few territories and states received a green light to implement their complete plans.

“Right now, it is the time to get the HAF implemented,” said Moulton. “Forbearances are starting to expire. If we go much beyond Jan. 1, it might be too late for some borrowers.”

According to consumer protection lawyers, advocates, and housing counselors, the expectation is that some state programs will be up and running sometime in the first quarter of 2022. After the plans’ approval, borrowers need to submit applications to the states, more complicated than the automatic forbearance plans provided to millions after a phone call to their servicers. Additionally, states will have to select and reach out to borrowers, which can take some time.  

Mortgage servicers are negotiating uniform procedures and documents with states, so their interactions can be faster when paying borrowers’ debts.

“Servicers don’t want to get in a position where the customers think they are deciding who gets the money or not,” said Dana Dillard, principal advisor at Housing Finance Strategies, a consulting firm for the mortgage and servicing industry. 

Up to the task?   

The recent experience with state distribution of rental assistance and unemployment insurance is perhaps a preview of the challenges ahead.

Between January and July, states and local governments spent only 20% of the $25 billion in emergency rental assistance funds available in the first round of the program, according to the Treasury Department. The Treasury launched new measures in August to reduce processing delays – for example, allowing self-attestation when other documents were not available.

Even by October, states such as Arizona (5%), Ohio (14%), and Florida (39%) distributed only a small share of their resources under the first phase of the program, according to the Treasury. Some states decided to prioritize payments via counties, which also had challenges in the distribution. In Arizona, counties distributed, on average, 71% of their funds, while in Florida the average was 58% and in Ohio, 51%. The Treasury estimates that at least 80% of the ERA’s funding will be spent or obligated by year-end.

States, overwhelmed with claims and understaffed, also had problems paying unemployment insurance. In some cases, people waited more than three months before they received a check, forcing them to make the choice between a number of terrible decisions – paying credit cards, buying food, making mortgage payments, or getting needed prescriptions. 

The Department of Labor also reported that as of Sep. 27, states and territories had identified $18.3 billion in overpayments made in the federal programs (regular and those related to the CARES Act) from April 2020 through June 2021, including $1.5 billion resulting from fraud, which reduces trust in programs.

The U.S. Government Accountability Office (GAO) is examining the implementation of the programs, including the implications of high claims volumes on the timeliness of benefit payments. GAO has interviewed 10 states (Arizona, Florida, Louisiana, Massachusetts, Michigan, Minnesota, New York, North Dakota, Wisconsin, and Wyoming) and plans to complete this work in the late spring of 2022.

In Florida, where Wilen lives, the Department of Economic Opportunity (DEO) also had delays and overpayment related to the state unemployment assistance program. “Many claimants, believing they were fully and accurately applying for Reemployment Assistance within the bounds of the law, received overpayments from the state,” Gov. Ron DeSantis wrote in a letter to the DEO on Oct. 15 recognizing the problem.

He requested the state’s Chief Financial Officer to indefinitely defer all referrals to collection agencies for all non-fraudulent overpayments incurred during the pandemic. The DEO told HousingWire that the state is not collecting the overpayments to ensure claimants do not experience adverse impacts to their credit scores. Also, the DEO said it is implementing 20 projects to modernize its systems, and 97% of all eligible benefits requested before Oct.15 for state assistance have been paid to claimants.

This same department will be responsible for allocating more than $676 million related to the HAF program in Florida. The state submitted the plan on Aug. 20 for review and approval. “Once the HAF Plan is approved, DEO will implement the program,” the DEO wrote to HousingWire. 

The first state to have the plan approved in November, New York, will cover up to $50,000 per household. “As we focus on our post-pandemic economic recovery, we need to do everything in our power to help New Yorkers stay in their homes,” Gov. Kathy Hochul said in a statement. 

The fund will distribute nearly $539 million to assist homeowners at the most significant risk of foreclosure or displacement in the state. According to the NYS HAF website, they expect to receive significantly more applications than can be funded by the program. The website explains that applications will be processed in the order they were received, and it does not guarantee financial assistance. 

Targeting the needy

Money for the program is short, so it is crucial to precisely target those who need assistance most. 

Updated Black Knight data shows that, as of the end of October, there was $58 billion in past-due mortgage principal, interest, taxes, and insurance on first-lien mortgages, down from $64.5 billion at its peak in February 2021. The figure for October is $26 billion above pre-pandemic levels, but experts say most borrowers who missed payments will get back on their feet through loss mitigation programs with lenders.  

“There’s a mismatch of the need and available resources. Policymakers are going to face trade-offs, and they’re going to have to make decisions [about how to distribute the money],” said John Walsh, a research analyst in the Housing Finance Policy Center at the Urban Institute. The institute has created a dataset that includes homeowners’ demographic and income characteristics, assessing foreclosure risk in counties, so policymakers can better target HAF dollars. 

Housing policy experts worry that the Covid-19 pandemic exacerbates the inequality in housing ownership – they indicate the HAF program as one way to mitigate this risk. According to data collected by the Census housing pulse survey, the share of white respondents not caught up on their mortgage payments in September was 5%, compared to 12% among Black and 12% among Asians. 

“We know that the people who are still in forbearance right now, the people that have been struggling to get out of forbearance, are disproportionately people with FHA loans, and they’re disproportionately Black and Brown,” said Moulton. According to the Federal Housing Administration, their share of lending to Black borrowers is around 17%, compared to 6% for the rest of the mortgage market. 

To help the most vulnerable population, Tara Roche, research manager for the Pew Charitable Trust, said that HAF will be available to those who are using alternative financing, such as land contracts (agreements directly between sellers and buyers) and loans secured by manufactured homes. These contracts lack protections that accompany mortgages, such as forbearance plans and foreclosure procedures. 

“We reviewed 36 state HAF plans that are publicly available, and we found that so far 21 states have included both groups: residents living in a manufactured home secured by a loan and homeowners with land contracts. And we found that 30 states had included at least one of those groups,” she said. Results, however, can change as many plans analyzed are drafts or preliminary programs. 

The HAF rules stated that any amount not made available to homeowners that meet income-targeting requirements must be prioritized for assistance to socially disadvantaged individuals, with funds remaining after such prioritization available for other eligible homeowners.

“The main challenge is to reach the population that is designated by statute, and the population who you think is most in need of this type of assistance,” said Meg Burns, executive vice president at Housing Policy Council. According to Burns, a simple program that is standardized across the states will help the most people, as complexity can be a barrier to success. 

If the program does break right, the benefits for the housing market are clear. 

Looking to the past, a study by six housing policy experts and economists – from universities such as Washington University, the Ohio State University, and the University of North Carolina – shows that the Treasury Department spent $45 billion to assist homeowners in the Great Recession. The most significant share went toward the Home Affordable Modification Program (HAMP), which launched in 2009.

But solutions for mortgage borrowers were focused on permanent loan modifications, with mixed success. 

In 2010, the Treasury launched the Hardest Hit Fund (HHF) program. The most significant subsidy was for mortgage payment assistance, paying homeowners’ loans until they secured employment or up to a typical maximum of 12 to 24 months. The HHF, which is based on mortgage payment relief, served as an inspiration to the HAF program.  

According to the study, HHF assistance leads to a 40% reduction in mortgage default and foreclosure probability through four years post assistance. The program prevented $8.3 billion in financial loss to lenders, investors, and governments during the Great Recession.

“It is important to consider that now the housing market is much stronger than it was during the Great Recession: borrowers can sell their home, they’re not as likely to be underwater,” Moulton, one of the study’s authors, told HousingWire. 

Sell, and go where?

But some troubled borrowers resist the idea of selling their homes, downsizing or becoming renters. 

Wilen, for example, has an outstanding balance as of Sept. 16 of $165,651.25 (his past due amount related to the forbearance is $20,095.95). His house value is estimated between $390,000 and $440,000, according to various automated valuation models. But, due to rising house prices in his area, he is afraid he will not find a house to accommodate his family adequately.

In Volusia County, where he lives, home prices rose by 12.6% in the second quarter, compared to a year earlier, according to the National Association of Realtors (NAR). In addition, there are costs associated with moving to a new place.

“The situation is frustrating. It is not my fault that I lost my job because of Covid,” he said. 

Since his forbearance plan expired at the end of September, Wilen has talked to his servicer, Lakeview, to find a solution. This was the first time he had to negotiate the mortgage in six years, and the option offered was a loan modification, he said. Lakeview didn’t answer phone calls and emails to comment on the case.

Wilen is afraid he will not pay even a lower mortgage bill. “This month [November] has been a struggle just making regular bill payments. My car payment was late for the first time because I couldn’t afford it. It was either the water bill, the power bill, the food, or the car,” he said. “If they tell me, ‘You’re gonna have to start paying $1,000 a month for a mortgage,’ I’ll be honest: I don’t know how I’m going to do it with my current income.”

According to counselor Jackie Boies, from the Money Management International, borrowers exiting forbearance have several options. If they can pay a mortgage, they can benefit from a loan modification or refinance, which will bring the mortgage current and lower the monthly payment.

Borrowers who can’t afford a modified payment will need to consider increasing their income with a second job, selling their home and downsizing considerably, and potential sale lease-back options.

Regarding Wilen’s situation, she said: “Truth is if he doesn’t want to be homeless, he’ll have to pay a mortgage payment or rent. Typical loan modifications might bring his payment down to just under $1,000, but he needs to tackle this now and not delay. Once he’s significantly delinquent, he has fewer options.”

She advises borrowers exiting forbearance and struggling to pay their mortgages to meet with a housing counselor. “There are a lot of emotions tied to your home. Part of the job of the counselor is to help that consumer set aside the emotional pieces and think about their overall financial picture.” 

Boies adds: “A counselor can also help borrowers look for resources. The difficulty is that resources vary greatly in cities, states, counties. Some have funds, but some don’t.”