Deciphering Pandemic Language on Mortgages

Even though parts of the country are “opening up” there are still millions of people out of work who are struggling to pay their bills, rent and mortgages.  As we move through this maze of “new normalcy” we are seeing some interesting and sometimes confusing verbiage showing up on credit reports for mortgages and some installment loans.

A lot of homeowners have taken advantage of the CARES act which allows homeowners to put their mortgages into forbearance or deferment for up to a year.  This covers all government backed mortgages, which includes Fannie Mae, Freddie Mac, VA, USDA and FHA.  Privately backed mortgages are not included under the CARES act but most of those lenders are offering some sort of forbearance or loan modification during this time.

During the forbearance or deferment time the lenders are not allowed to report a borrower as late to the credit bureaus. But there are certain “codes” that they are using to report with that can cause some issues.  Most of these codes can’t actually be seen on credit reports, but they show up as specific verbiage on the individual accounts. To actually see the codes, you would have to be able to dive deep into the raw data on the credit report. Which is something that consumers and brokers don’t have access.

The most common code being used right now is the AW code (Affected by Natural or Declared Disaster).  This is a code that was most commonly used during Hurricane Harvey in 2017.  Even though COVID-19 is not a hurricane, fire, flood or tornado it is still being called a Natural Disaster.  A lot of lenders are using this on every single loan they service whether the loan is in forbearance/deferment or not.  The good thing is it has no effect on the account, its history or the credit scores.  A problem with this though is that some lenders are using this code to specifically show that the account is in a deferment/forbearance status.  And it does still show on loans that were affected during disasters such as Hurricane Harvey. This can be confusing as there is no way to tell if it actually is because the property is in an area that was affected by a disaster such as a flood or tornado or if it’s because it’s in forbearance under the CARES act.

There are several other “codes” that lenders are now using to designate if an account is in a forbearance or deferment status.  Again, most of these codes cannot be seen when looking at the credit report.   They can only be found in the raw data.  One code that can sometimes be seen is a “D” in the payment history.   Instead of seeing a number in this area, the months the loan in in deferment/forbearance will show as “D” (deferred).

Another issue is that some underwriting systems are picking up a mortgage that is in forbearance as ‘pre foreclosure’ and denying the loan.  The assumption being that if an account is in deferment there is no way to know if the borrower will actually be able to begin payments again.  In that case the loan would go into foreclosure.

Some lenders are also applying forbearance codes for borrowers even if they have only called to inquire about forbearance options but never actually take the forbearance.  This can be extremely frustrating for borrowers wanting to refinance their existing mortgage as you can’t refinance during a forbearance period.  And with some lenders you have to be out of that status for 6-12 months before you can refinance.

It is important to remember that the forbearance/deferment is NOT forgiveness of the loan. It is simply suspending payments until the consumer can regroup financially and begin payments again. The missed payments are still due once the forbearance ends. There are several options available as to how that money can be paid backed. Whether that be as a lump sum or divided up among existing payments.   Interest will still also accrue during the forbearance period.

Even though late payments are not supposed to be reported during the time of forbearance that does not mean some might not slip through the cracks.  So, it is extremely important for consumers to monitor their credit reports closely during this time. 

If a consumer only asks about forbearance and does not initiate one, yet the comment appears on their credit report, they need to contact their lender and ask for it to be removed. If a consumer is going to call only to make an inquiry it would be very proactive of them to state specifically to the lender that this is an inquiry only and to please not report to the bureaus with any sort of forbearance codes.

Bottom line is it is very important for consumers to stay in communication with their lenders during this period and to keep a very close eye on their credit reports to ensure accuracy.

Stay Safe!  Stay Healthy

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