Forbearance
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In the context of a mortgage process, forbearance is a special agreement between the lender and the borrower to delay a foreclosure. The literal meaning of forbearance is “holding back.”
Loan borrowers sometimes have problems making payments. This may cause the lender to start the foreclosure process. To avoid foreclosure, the lender and the borrower can make an agreement called "forbearance". According to this agreement, the lender delays his right to exercise foreclosure if the borrower can catch up to his payment schedule in a certain time. This period and the payment plan depend on the details of the agreement that are accepted by both parties.
Historically, forbearance has been granted for customers in temporary or short-term financial difficulty. If the borrower has more serious problems, i.e. where the return to full mortgage payments in the long term does not appear sustainable, then forbearance is usually not a solution. It needs to be noted that each lender is likely to have their own suite of forbearance products.
Examples of the types of forbearance which lenders may potentially consider are:
- A full moratorium on payments
- A reduced repayment (above Interest Only - this is termed Positive-Amortising)
- A reduced repayment (below Interest Only - this is termed Negative-Amortising)
- Interest Only
- A reduced loan rate %
- Split Mortgage
It needs to be understood that the type of forbearance being granted is being provided based on the customer's individual circumstances. i.e. customers in short term financial difficulty would be more likely to be approved of either a (short term) full moratorium or negative-amortising deal compared to customers in long term financial difficulty where the lender would at all times seek to ensure that the capital balance continues to be reduced (via an amortising forbearance arrangement). Negative amortising forbearance arrangements are only suitable as short term deals because the loan balance will continue to increase as full interest is not being paid.
When a lender offers a forbearance, they are taking control of the situation so that they can maneuver whichever way best serves the lender. The borrower is still responsible for the total monthly payment due each month, though they will accept the agreed forbearance amount. On expiry of the agreed forbearance period the loan account reverts to its original form. In most instances, on expiry of the forbearance period, the difference between the level of forbearance granted and the full repayment (which was missed) is recalculated over the remaining term and the customers new repayment is based on the current loan balance, rate and term.
The exception to this is where a reduced rate was given (the intention here was to reduce the capital balance as quickly as possible, thereby reducing the loan to value) or where the type of forbearance is for the lifetime of the loan, i.e. a split loan where 1 part of the loan is parked until the expiry date, with the intention that at that time a suitable repayment vehicle (say, sale of asset) is in place for the repayment of the loan in full.
