With COVID still hanging around, a term has come up more and more in recent months, and it’s the term “forbearance”.
Now, forbearance, back when I started investing, you would take payments toward a debt, oftentimes a mortgage, and you put it at the end of the loan. So, let’s say I’m five years into a loan and I have trouble because of job loss or whatever, and I had a $500 a month payment, and I asked for a forbearance. I ask the bank to grant me a forbearance where they said, “Hey, we’ll take, call it three months of payments, so that would be $1,500, and we’re going to put it at the end of the loan. So it’s three additional payments at the end.”
Now, interest would still accrue during those three months that I didn’t make a payment, but at least I don’t have to make the payment. So the cost of doing business is essentially three months of interest that gets tapped on.
Now, that seems to have shifted. I’ve seen forbearance programs where they say they will defer, the same three months of payments, but at the end of the fourth month, it’s all due. So, it’s crazy because what you’re really doing is creating a bitter debt burden on a much shorter time frame. And I don’t see how that’s going to play out super well for people.
I’ve also seen where you can get a forbearance for three months or even six months, and then it comes time to make payments. But if the situation with COVID isn’t better or there’s still distress, then you can apply for another six months, and then possibly even a third six months. It’s more of a kick the can down the road approach. It sounds a lot like what happens more or less with a lot of student loan debt. So, it’s a little bit of a dynamic environment.
So, if you’re going to do a forbearance for any reason, or if you’re working with sellers who are going to do one, be really conscientious of what the terms of that forbearance are. It’s just far too often. I’m seeing examples now that could create trouble in the not-too-distant future. If we could get terms more like the traditional forbearance, which truly put at the end, and when payments are able to be resumed, it’s as if nothing happened, except that, essentially, the loan balance went up a little bit, that tends to be what is the most ideal situation. So, as you did in with this subject, as always, the devil is in the details. Read the fine print.
Happy investing!