With unemployment at record levels, many need to put off mortgage payments through forbearance. However, can unemployment numbers predict the number of mortgages that go into forbearance?
According to a study from the Urban Institute, the relationship between forbearance and unemployment is complicated. To determine how much support mortgage servicers need requires some estimate of the mortgage forbearance rate, which researchers note is not easy. Urban offers three reasons the forbearance rate might be higher than the homeowner unemployment rate
One reason the forbearance rate might be higher than the unemployment rate is that borrowers who were experiencing financial hardships before COVID-19 will likely seek forbearance under the CARES Act. Some of these borrowers may opt to take advantage of the new forbearance option, which does not require proof of unemployment or income reduction.
Additionally, many people who have lost some income do not qualify for unemployment. Although some states have a concept of partial unemployment, the rules generally require workers to earn less than they would in unemployment benefits if they were fully unemployed.
Last, Urban states that as the CARES Act does not require borrowers to submit documentation to verify a hardship, borrowers might seek forbearance in anticipation of future job loss.
Urban also lists three reasons why the forbearance rate could be lower than the unemployment rate. For example, researchers suggest that even unemployed homeowners may be in a good position to pay their mortgage. Urban cites The American Community Survey, which shows that the median family income of homeowners of $93,000 is much higher than the median family income of homeowners without a mortgage ($55,000) or of renters ($41,000). This means that many homeowners have savings or can tap into their home equity to make their payments.
Second, Urban states that CARES Act payments alongside boosted and base unemployment benefits may replace lost wages entirely, allowing many unemployed homeowners to make their mortgage payments.
Finally, researchers point to the fact that the unemployment rate does not take dual incomes into account. Homeowners are more likely to be married and have dual incomes than renters, so some households may be able to continue paying their mortgages. If one borrower has lost his or her job, but the co-borrower has not, the family may still be able to pay the mortgage.