Forbearance agreements can be tricky to navigate. The managers at Yieldi, having lived through the great recession, learned many valuable and painful lessons in loan workouts and restructurings—and we’re here to share those lessons with you.

A common tool for lenders with troubled loans is the forbearance agreement. Forbearance agreements accomplish many things for lenders. Forbearance agreements can help borrowers weather storms to catch up on payments. Any forbearance arrangement or loan modification is taken into consideration on a case-by-case basis.

Below, we’ll walk you through everything you need to know about forbearance agreements. We’ll help you learn how to use them to improve the financial situation for both you and your borrowers.

What Is a Forbearance Agreement?

A forbearance agreement is a formal and temporary arrangement between a lender and a borrower that allows the borrower to temporarily suspend or reduce their monthly mortgage payments. This helps prevent borrowers from defaulting on loans and facing foreclosure.

Forbearance agreements are often used during times of economic uncertainty, such as job loss, medical emergencies, or other unexpected financial challenges. If a borrower is struggling to make payments, it’s best to proactively reach out and see if this is a solution that’ll work for both of you.

Typical Features of a Forbearance Agreement

Key features of a forbearance agreement include:

1. Payment Relief: Under a forbearance agreement, the lender agrees to temporarily reduce or suspend the borrower’s monthly mortgage payments. This provides immediate financial relief to the borrower during a difficult period.
2. Duration: The agreement outlines the specific duration of the forbearance period. This period can vary but is typically short-term, lasting a few months to a year.
3. Repayment Terms: The agreement specifies how the missed or reduced payments will be repaid once the forbearance period ends. Repayment options may include adding the missed payments to the end of the loan term, spreading them out over a period, or modifying the loan terms.
4. Interest Accrual: While payments may be reduced or suspended, interest on the loan typically continues to accrue during the forbearance period. This means that the total amount owed may increase over time.
5. Eligibility: Borrowers must demonstrate a genuine financial hardship to qualify for a forbearance agreement. Lenders often require documentation or proof of hardship, such as job loss notices, medical bills, or other relevant information.
6. Communication: Open communication between the borrower and lender is essential. Borrowers should contact their lender as soon as they anticipate difficulty in making mortgage payments to discuss forbearance options.
7. No Negative Reporting: During the forbearance period, the lender agrees not to report the missed or reduced payments to credit bureaus, which helps protect the borrower’s credit score.
8. No Foreclosure: As long as the borrower adheres to the terms of the forbearance agreement, the lender agrees not to initiate foreclosure proceedings during the forbearance period.

How Does a Forbearance Agreement Work?

Here’s how a forbearance agreement typically works:

1. Financial Hardship: The borrower experiences significant financial hardship, such as job loss, medical expenses, or other unforeseen circumstances.
2. Contacting the Lender: The borrower contacts the lender as soon as they anticipate difficulty in making mortgage payments.
3. Application and Documentation: The lender provides the borrower with an application for forbearance.
4. Evaluation and Approval: The lender reviews the borrower’s application and assesses their eligibility for forbearance based on the provided documentation. If approved, the lender determines the terms of the forbearance agreement.
5. Forbearance Terms: The lender and borrower agree on the terms of the forbearance, including the duration of the forbearance period and the reduced or suspended payment amount.
6. Repayment Plan: The forbearance agreement outlines how the missed payments will be repaid once the forbearance period ends. Repayment options may include adding the missed payments to the end of the loan term, spreading them out over a period, or modifying the loan terms.
7. End of Forbearance: Once the forbearance period ends, the borrower resumes making their regular mortgage payments as specified in the agreement.
   

Remember, forbearance is a short-term solution and is not forgiveness. The borrower is still obligated to repay the mortgage according to the agreed-upon terms.

How to Use Forbearance Agreements

Understand Your Borrower’s Situation

All loan workouts, like any foreclosure or other legal proceeding, should begin with a thorough review of the loan file. The forbearance agreement is, first and foremost, an opportunity to fix or remedy any errors or oversights in the loan documents.

Check Outstanding Taxes

You can run an online search to check this. You will want to add any unpaid taxes to the forbearance agreement.

See What You Have to Gain

The lender should always have predetermined goals:

• What are the expectations?
• Best case scenarios that the parties hope to achieve?
• Is the lender interested in continuing a lending relationship with this borrower?
• Is the liquidation of the collateral the goal, or do you want to pursue a foreclosure and take back the asset?
• Is there a personal Guarantee?
• Are there environmental concerns?
• Are you in a judicial or non-judicial foreclosure state?
  

Offer Customized Solutions

Tailor forbearance terms to each borrower’s situation. Discuss the duration of the forbearance period, the reduced or suspended payment amount, and potential repayment options.

Explain Repayment Plan

Discuss how the missed payments will be repaid at the end of the forbearance period. Provide clarity on repayment options, such as spreading the missed payments over a set period or adding them to the end of the loan term.

What to Include in Your Forbearance Agreements:

By offering flexible and compassionate solutions, you can assist borrowers in overcoming temporary hardships while maintaining the long-term health of your lending portfolio.

At Yieldi, we have a checklist of items to include in forbearance agreements:

• All of the existing loan notes obligations
• Amount due or past due of security agreements
• Past due taxes
• Borrower should acknowledge an existing default under the loan documents.
• The forbearance agreement should provide terms.
• The payment schedule should be clearly defined, and what happens in case of a default.

The agreement must include remedies upon default. If the agreement provides for a deed in lieu then Yieldi would be entitled to record the deed and take ownership upon a default. The agreement should at a minimum provide that the bank would have all of its available remedies at law (foreclosure, collection,). The lender will want a release from any and all liability relating to the loan documents from the borrower and guarantor. Additionally, the lender should include a jury waiver so that any litigation going forward will not be subject to a demand for a jury by the borrower or guarantors.