Mortgage Forbearance Rates Fall Below 4% for First Time in a Year

Fewer borrowers are in forbearance. Does that mean the economy is improving?

Early on in the pandemic, when millions of jobs were seemingly shed overnight, it became clear that mortgage borrowers would need relief or otherwise face a massive foreclosure crisis. The solution came in the form of forbearance.

Mortgage forbearance existed before the pandemic, and it's an option that allows borrowers to temporarily hit pause on their home loan payments without being reported as delinquent to the credit bureaus that determine credit scores. But prior to the coronavirus crisis, loan servicers had the right to deny forbearance at their discretion. During the pandemic, all mortgage borrowers have been entitled to forbearance, and the only requirement has been to attest to a financial hardship, like the loss of a job or a reduction in hours at work.

While many homeowners put their mortgages into forbearance early on in the pandemic, last week, the percentage of home loans in forbearance fell to below 4%, according to the Mortgage Bankers Association. That's the first time that rate has been under 4% in a year.

At this point, an estimated 2 million homeowners still have a loan in forbearance. But the fact that forbearance exits have picked up could be a sign that the U.S. economy is finally doing better.

A step in the right direction

Homeowners who took advantage of mortgage forbearance during the pandemic were initially entitled to pause their home loan payments for 12 months. But that period was later extended to 18 months.

Still, homeowners who entered forbearance very early in the pandemic have not yet run up against that 18-month deadline. As such, it's fair to assume that some people are exiting forbearance now because they can once again afford to keep up with their mortgage payments. And that's a sign that the economy is in better shape than it was even just a few months ago.

The U.S. jobless rate, as of May, sat at 5.8%. In April of 2020, it spiked at 14.7%. The unemployment rate is still higher than it was before the pandemic, but now a lot more people have managed to find their way back to work.

However, as mentioned earlier, 2 million borrowers still have their home loans in forbearance, and it's unclear if they'll manage to make their payments once that option runs out. But thankfully, the Consumer Financial Protection Bureau is implementing a rule to prevent mortgage borrowers who exit forbearance from losing their homes for the remainder of the year.

It's too soon to say whether the forbearance rate will continue to decline on a weekly basis, but the fact that the percentage of paused home loans has dropped is a good thing. Meanwhile, borrowers who aren't ready to exit forbearance should contact their loan servicers before that option runs out. That way, they can discuss their options for potentially extending forbearance or, at the very least, modifying their mortgages to make them more affordable.