Forbearance vs. Loan Modification: An Analogy

A forbearance is not a long-term remedy. A forbearance is simply a band-aid for a deep dash. In contrast, a loan modification gives homeowners a long-term remedy. Upon approval of a loan modification, the lender typically agrees to modify the original loan terms, from the time you first obtained the loan.

What the banks fail to tell you is that a forbearance can actually set you up for foreclosure. This partly has to do with a couple of clauses that you previously agreed to when you first obtained the loan. Those two two clauses are as follows: (1) acceleration clause and (2) prior forbearance clause.

(1) An acceleration clause in a mortgage note is very common and allows the lender to accelerate the maturity date on your note if you fail to make a monthly mortgage payment (i.e. go into default). Without an acceleration clause, the lender’s only recourse for a borrower’s default is a lawsuit to recover the delinquent payments or a partial foreclosure for the amount of the delinquent payments each time a borrower defaults on his/her mortgage. Mortgage notes very often include an acceleration clause.

A common issue with acceleration clauses arises when lenders approve homeowners for a forbearance. In some states, a lender cannot accelerate the loan if they have a history of allowing late payments unless the lender first provides notice to the borrower that a timely payment will be required under the mortgage. States that follow this principle of reinstatement of timeliness do not allow lenders to accelerate and foreclose until the late payment after reinstatement of timely performance.

(2) In states such as California, howeverlenders can overcome this obstacle by simply including a “prior forbearance” clause in the note or deed of trust, such as the following:

“Lender may exercise the option to accelerate during any default by Borrower regardless of any prior forbearance.”

The above is a prior forbearance clause and it is among your lender’s most favorite clauses. A prior forbearance clause allows the lender to accelerate your loan when payment is late even if late payments have been made in the past (such as late payments during a post-COVID-19 forbearance plan). Under a prior forbearance clause, your lender/servicer does not need to reinstate its right to demand payment before declaring the loan in default and accelerating the loan for the full amount due. So, as you can see, it does not matter if the lender approved you for a forbearance plan during the COVID-19 pandemic, once the forbearance period expires the lender can immediately take steps toward the foreclosure of your home.

Having said that, a forbearance agreement may be a good opportunity for homeowners who have a game plan to get back on track during the forbearance period. Please feel free to contact our office to help explore a solid gameplan to avoid foreclosure.