So last week I shared with you an article talking about the increase in mortgage loan forbearance and how it increased last week to 8.5%. Click here if you’re interested in reading it.
But, what does this mean?
First, what is forbearance? Forbearance, as defined by the Consumer Financial Protection Bureau, is when your mortgage servicer, that’s the company that sends your mortgage statement and manages your loan, or lender allows you to pause or reduce your payments for a limited period of time. Forbearance does not erase what you owe. You’ll have to repay any missed or reduced payments in the future. But, how and when will you need to repay? That’s to the discretion of your lender or mortgage servicer. So, if you’re able to keep up with your payments, keep making them.
Now that you know what forbearance is, what does it mean to you if you’re planning to buy or invest in Real Estate?
It’s important to take a step back and understand the domino effect involved with this process. From a very broad perspective, when you take out a mortgage the bank turns around and sells that mortgage to investors (Fannie Mae & Freddy Mac being the largest ones) so they (the bank) can have more money to keep lending. So ultimately, these investors are happily waiting for you to pay your mortgage on time every month.
If the borrower does not pay, investors are not happy and are going to want to get out of the investment. How can they get out? Foreclosure and Short-Sale are the ways of doing it.
As I mentioned in my first post ever (I believe… – My views on the Market), evictions had been suspended in Florida until June 2, then our Governor pushed that date back to June 30th. If you’re a landlord and you were not financially prepare for this pandemic and your tenants lost their jobs due to COVID-19, you probably haven’t seen a check from your tenant since March and you can’t do anything about it since you can’t evict them either, and even if you could start the eviction process on June 30th, that’s a process that could take between 60-90 days to be completed. In other words, a good 6 months will go by before you can start seeing rental income from your investment property.
If you have a mortgage on your investment property and the scenario above applies to you, the investors holding your mortgage might not be too happy with you at this moment since they have not been paid. So what are they thinking about? Probably getting out. (See above how they can get out)
We can note that one individual who is in a situation like this will not do harm to the market. But, how many people do you know that buy investment properties taking out a mortgage? Based on the article from last week, 11.82% of loans given to investors for investment properties are in forbearance at this moment meaning we can start seeing fire sales going on in the coming future. How soon can we see the effects on this? Based on my research, the earliest would be in September, but definitely towards the end of the year and into 2021.
What do you think about this? Feel free to email me or drop a comment with your thoughts on this whole situation.