Can You Refinance a Mortgage in Forbearance?

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If you want to refinance your mortgage but you’re enrolled in a forbearance program, you will first need to end the forbearance then meet certain conditions.

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Refinancing involves paying off your original loan taking out a new loan with new terms. If you can reduce your interest rate or lengthen your repayment period, your new mortgage payment may be easier to manage.

Canceling your mortgage forbearance plan refinancing could put your home loan back on track. Here’s what you need to know.

What Is Mortgage Forbearance?

Mortgage forbearance is an agreement between you your loan servicer or lender that temporarily pauses or reduces your mortgage payments. The bank also agrees not to start foreclosure proceedings during this time.

Homeowners who have a federally backed mortgage are facing pandemic-related hardships are entitled to a forbearance of up to 18 months.

If your loan is owned by Fannie Mae or Freddie Mac, you don’t have a deadline for requesting an initial forbearance. The deadline is Sept. 30, 2021, for requesting an initial forbearance if your loan is guaranteed by the Federal Housing Administration, the Department of Agriculture or the Department of Veterans Affairs.

Forbearance agreements eventually end, though, homeowners might be stuck with expensive mortgage payments just as they’re getting back on their feet.

“The homeowners will also need to make up the missed payments,” says Ed DeMarco, president of the Housing Policy Council, a trade group representing mortgage lenders servicers. “These missed payments may be deferred to the end of their mortgage term or may be rolled into the mortgage balance.”

In these cases, a refinance might help. “Today’s low interest rate environment creates an opportunity for many homeowners to reduce their monthly mortgage payments or shorten their loan term,” DeMarco says, “either of which may reduce risk for the borrower the lender.”

Can You Refinance a Mortgage in Forbearance?

Before the pandemic, homeowners had to wait at least 12 months after their payments were current again to apply for refinancing. But COVID-19 has changed the rules, certain borrowers might be able to refinance sooner.

If you have a loan backed by Fannie Mae or Freddie Mac, or by the FHA, USDA or VA, here is what you need to know:

Fannie Mae or Freddie Mac. You’ll need to make three timely payments under a loan modification or repayment plan before you can refinance. Then you may refinance the entire loan amount, including any missed payments, into a new loan.

You can use the online lookup tools for Fannie Mae Freddie Mac to find out whether one of them owns your mortgage.

FHA. Borrowers will need to exit forbearance to refinance. “But the requirements vary by loan program or by the individual lender or investor that holds the loan,” DeMarco says.

If you want a rate-and-term FHA refinance, for example, you must first make three consecutive on-time payments. Streamline refinances also require a minimum of three consecutive payments, while cash-out refinances require at least 12 consecutive payments.

USDA or VA. If your mortgage is backed by one of these agencies, call your mortgage servicer to see what your options are. You can look up your loan servicer using the Mortgage Electronic Registration Systems, or MERS, website.

How Can You Qualify for a Refinance?

Borrowers can refinance after a forbearance, but only if they make timely mortgage payments following the forbearance period.

If you have ended your forbearance made the required number of on-time payments, you can start the refinancing process. Here’s what you’ll want to do:

Assess your financial standing. Eligibility for refinancing your mortgage depends largely on your financial situation. Lenders generally look for a credit score of at least 620, which falls in FICO’s fair range, a debt-to-income ratio of no more than 43% for conventional loan refinancing.

But many lenders have ramped up their requirements.

“To qualify for a refinance now, since the pandemic hit, is a bit harder,” says Karen Solgard, a loan consultant with New American Funding, a national mortgage lender. “Lenders are really looking for signs that the borrower may be headed to a forbearance request. I have been seeing that credit scores below 700 will make the interest rate go up considerably, unless there is at least 40% equity in the property.”

Improve your credit score, if necessary. Here’s how:

  • Always pay your bills on time.
  • Pay down your debt. Using no more than 30% of the available credit on any card can help your credit score.
  • Pull your credit reports for free from AnnualCreditReport.com look for inaccuracies. You can dispute errors with the credit reporting agencies.
  • If one of your friends or family members has a strong credit history, ask to be added to an account as an authorized user.
  • Avoid applying for new credit, which can signal a worsening financial situation.
  • Keep credit card accounts open to maintain the length of your credit history.

Contact several lenders to obtain quotes. Compare interest rates, annual percentage rates, estimated monthly payments closing costs.

“Check interest rates to see if they are about 1% lower than your current rate,” Solgard says. “Right now, rates are at historic lows. If (your) current rate is above 4%, there may be a benefit to refinance.”

The refinance might even work in your favor with a shorter loan term, especially if you’re getting rid of mortgage insurance, she adds.

“I am seeing an advantage for some borrowers to refinance to a 15-year (term) to get a lower interest rate,” Solgard says. “If there is plenty of equity in the property, they are switching from FHA (with) mortgage insurance to a conventional 15-year (mortgage), the payment is nearly the same.”

What Are Alternatives to a Refinance?

Refinancing isn’t the only option if you need a more manageable mortgage payment. You can request a loan modification, sell your home or stay in forbearance.

Here’s more about each of these choices:

Asking for a loan modification. This is an arrangement you make with your lender to permanently change your loan terms. The lender could lower your interest rate, lengthen your loan term or, in rare cases, forgive some of your principal.

A loan modification might be a good option if you don’t qualify to refinance or can’t afford closing costs.

“A lender really wants people to be able to keep making monthly payments, even if it is at a reduced amount,” Solgard says. “The homeowner needs to project their budget out into the future. If they really can’t afford to pay the current mortgage, they may have trouble refinancing as well, the loan modification is the only option.”

Selling your home. Consider your income your expenses for the foreseeable future. If you think you’ll have trouble making payments because money is tight but you have equity in your home, you might want to sell it to avoid a short sale or foreclosure.

But keep in mind that any payments missed during forbearance will probably be due once you sell the home.

Extending forbearance. After three to six months in forbearance, evaluate whether you’re still financially struggling then call your loan servicer to determine the next steps.

“The servicer may be able to extend the forbearance, but the homeowner must request such an extension,” DeMarco says.

Extending forbearance might be a good idea if you can’t pay your bills this option is still available to you, Solgard says. Just be sure you have a plan for eventually making up your missed payments.

After exiting mortgage forbearance, you may be able to defer those payments to the end of the loan term, create a payment plan with your loan servicer or modify your loan terms. You can also pay everything back in one lump sum, though your loan servicer can’t require it.

Ultimately, the guidelines on forbearance refinancing mean that homeowners don’t have to choose between short- long-term mortgage relief. If you’ve entered forbearance, refinancing to a lower interest rate is still within reach can give you more control over your financial future.

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Get a guardian appointed to protect assets

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Ours is a joint family, though we live separately. We have a shop that is in the name of my grandmother (self-acquired in 2000). My father passed away in 2012. My grandmother suffers from dementia doesn’t remember much. I have apprehensions that my uncles are going to sell her property by taking my grandmother to the registrar’s office on some pretext (or maybe they already have). Is there any way I can stop them from selling the property on the grounds that my grandmother is of unsound mind? Do I need to file a petition for that? Or can we register any claims to property which can prevent them from selling without our consent? If they have already sold it, can it be challenged now?

—Name withheld on request

 

During the lifetime of your grandmother, you cannot raise any claims to the property, especially since the shop is her self-acquired property. Therefore, in the given facts of your case, you will have to first file an application for appointment of a guardian before the court having the appropriate jurisdiction. This application should be filed during her lifetime. In this application, you will have to first prove her incapacity to take decisions then on that grounds seek an interim relief of appointing a suitable person as guardian for her under the Mental Healthcare Act, 2017, so that the assets of your grandmother could be protected. The person so appointed by the court as guardian shall act as trustee guardian of her property.

Also, once the application is filed, you can register Lis Pendens with the sub-registrar’s office so that you can easily challenge any sale if done without your knowledge.

As regards your query whether the sale can be challenged, if your uncles have already sold the shop, you can go for a search in the sub-registrar’s office apply for a certified copy of the sale agreement.

Thereafter, you can use the sale agreement as a part of your proceedings. You can challenge such sale in the aforesaid application that may be filed for appointment of a guardian.

Aradhana Bhansali is partner, Rajani Associates.

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In unusual times, some Interesting trends in credit

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Since the start of the asset quality review launched by the Reserve Bank of India (RBI) in 2015, followed by the Insolvency Bankruptcy Code (IBC) in 2016, bad loans of banks went up in a jolt due to proper discovery. Since then, it has been coming down due to measures including write-offs, recoveries settlements. In the current phase of the pandemic economic weakness, this trend of improvement, or easing in non-performing assets (NPAs), continues in loans to industry.

Broadly, banks give four segments of loans: loans to industry, which have the highest incidence of NPAs; loans to agriculture with second-highest incidence of bad loans; loans to services then to retail. In FY21, NPAs in industry as a sector improved palpably, agriculture also showed marginal improvement.

However, loans to services retail showed a mild deterioration. Let us scratch the surface.

Overall, in 2020-21, banks showed improvement in slippage ratio, which measures incremental NPAs. It declined to 2.5% in March 2021 from 3.8% in March 2020. While there was a decline in large NPA accounts with resolution of cases under IBC lower slippages in the corporate segment, there was a relative increase in retail NPAs services.

Within retail loans, all sub-segments such as housing loans, vehicle loans, credit card, other retail loans showed slippages, with the most noticeable surge being in credit card loans. As mentioned initially, the stress is seen in retail loans MSMEs. According to data from Care Ratings, taking retail MSMEs together as a segment, for private sector banks, the gross NPA was 2.01% in June 2020, which moved up to 2.68% in March 2021 further to 3.32% in June 2021.

For public sector banks (PSBs), taking retail MSMEs together, gross NPA moved from 5.99% in June 2020 to 6.52% in March 2021 further to 7.28% in June 2021.

The RBI allowed one-time restructuring for corporate, MSME retail loans, which was open till 31 December 2020 (framework 1). This was partially extended for retail MSME loans is open till September 2021 (framework 2).

As per Care Ratings data, most restructuring has been done by PSBs: as on 30 June 2021, PSBs have restructured nearly 98,000 crore of advances, while private sector banks have restructured around 39,000 crore under both frameworks. The segment-wise breakdown of the data shows that in Resolution 1, corporates had the higher share of resolutions (57%), followed by personal loans (28%) MSMEs (11%).

If we look at the combined break-up of restructured advances under both resolution frameworks, retail with MSME has the higher share (54%). What we derive from this discussion is that the rise in slippages restructuring indicates stress build-up in the retail segment in a covid-impacted scenario. During the second wave, there was no blanket moratorium that was there earlier, from March to August 2020.

To recap the data on action by rating agencies, Crisil credit ratio, which measures upgrades to downgrades, went up to 1.33 in the second half of FY21. The number of upgrades was 294, against 221 downgrades. In FY21, Icra downgraded 14% of its rated universe upgraded 8%.

Though the ratio was less than 1, it was still an improvement than earlier. Care Ratings publishes a metric called Debt Quality Index on a scale of 100 (base year FY12). This has improved marginally from 89.51 in March 2021 to 89.85 in July 2021. India Ratings (a subsidiary of Fitch) downgraded 199 issuers upgraded 147 issuers in FY21. Here also, the ratio was less than 1, but was still an improvement than earlier.

Now, how do we reconcile the stress on retail with improvement in corporate ratings?

Corporates, broadly, have done a commendable job of reduction in debt improvement of margins in stressful times. Retail loans, notwithstanding the stress, remain the lowest NPA segment for bank loans (approximately 2.5% in FY21) industry, even after the improvement, remains most stressful (approximately 10% in FY21). In retail loans, the worst impacted is credit cards, with NPAs shooting up from 1.5% in FY20 to 3.5% in FY21. This is a message for people to be more temperate in usage of credit cards.

Joydeep Sen is a corporate trainer (debt markets) author.

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Mutual fund categories for the first-time investor

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Mutual fund investing requires patience understanding your risk appetite. Choosing the right scheme today can be a daunting task given the options available the market conditions.

The biggest mistake investors could make while beginning their investment journey is looking at the past returns. Here is a checklist to follow if you are investing in mutual funds for the first time.

According to experts, new investors will find it tricky to time the market. Also, they say, if investors have good experience in the market initially, they tend to stay invested for the long-term.

Harshad Chetanwala, a Sebi-registered investment adviser (Sebi-RIA) co-founder of MyWealthGrowth, believes it is good to begin the mutual fund investment journey with a portfolio of well-established companies.

“A gradual approach to investing can work well at present, hence, SIPs (systematic investment plans) are the best way to begin in any market condition,” he said.

With the market at an all-time high, Chetanwala suggests that first-time investors should consider investing in index or large-cap funds. “They should avoid small-cap mid-cap funds at this stage as these are more volatile.”

According to Kirtan Shah, chief financial planner at Sykes Ray Equities (I) Ltd, if someone wants to do an SIP of 10,000, he or she can look at an index fund, a flexi-cap fund a value fund, which will give the right kind of diversification.“Historically, at such high valuations, value has worked really well. So, if someone is starting, they should not try invest in schemes they don’t understand. So, thematic or sectoral themes that are flavour of the season, can be avoided.”

Despite pricey valuations, experts say it doesn’t make sense for new investors to invest outside of equities. However, the investment horizon should be of at least seven to 10 years.

For Nishith Baldevdas, founder of Shree Financial a Sebi-RIA, a balanced advantage fund (BAF) would be the best strategy for investors coming into the market right now.

“It is dynamically managed protects downsides as well. Ever since the Sensex hit the 46,000 level, we have been suggesting the asset allocation option. Newcomers are mostly coming in looking at the returns over the past one year. However, they haven’t seen the downside, which can be much more painful,” he said.

BAFs, also called dynamic asset allocation funds, have equity allocation between 30% 80% depending on market conditions. “Even if investors have long-term goals, we are starting with BAFs, because we will be changing the strategy tactically once the valuations become attractive less expensive. At that point, we might move to mid-cap or large-cap,” said Baldevdas.

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For value to deliver, interest rates have to go up: ICICI Pru’s Naren

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At the start of 2021, given the market outlook, you suggested asset allocation funds. Since then, there has been a rally in equity. So, do you think this rise is unjustified?

Today, the global equity market is largely driven by central bankers, given that central banks have flooded the market with money; first from 2008, later in a lot more aggressive manner from March 2020. If this trend continues, market valuation is bound to expand. At the same time, policymakers have kept debt interest rates very low. As a result, these are challenging but interesting times for fund managers both in India globally. The exception to this is China where markets have witnessed a reasonable correction post some of the stringent measures announced by their government ex-China we have seen a situation where globally markets have been only going up.

As an asset manager, is it possible to predict what central banks will do?

In the time from World War II till 2008, central banks stayed away from printing pumping of money into the global financial system. Hence, we do not know the likely long-term side-effects of quantitative easing worth $25 trillion thus far. Unfortunately, there is very little economic literature which helps us understthis aspect. Probably two decades later, we will be in a much better position to understthe impact of these decisions. Till then, from a mutual fund point of view, we are committed to believing in asset allocation that while valuations expdue to factors which are difficult to guess, at some point in future, they will revert causing potential losses to investors who don’t remain disciplined. While it is impossible to predict when this will occur, the possibility remains it could play out when central banks decide to tighten monetary policy. What we can state with confidence is that practising asset allocation will work favourably in such times.

There are a number of IPOs coming to the market. Is that a sign of the market topping out?

At this point, we believe it is very important for investors to practice asset allocation that we should make choices based on earnings connected to 2021 or 2022, invest in names which have steady operating cash flows, dividend yield, etc. The key learning from 2007 is that investors who invested in IPOs based on 2014 earnings were in for a disappointment. There is a fair amount of froth in many parts of the markets, particularly in new-age areas. Unlike Asia which has seen periodic market corrections, since 2012, US equities have barely witnessed a meaningful correction. Today the number of loss-making new age companies trading at stretched valuations is very high in the US compared with dividend-paying, cash flow-generating old economy oriented companies.

The other outlook that you mentioned was a potential shift from growth to value at the start of 2021, a call which has played out. Do you see this continuing? Or are growth value stocks more or less equally attractive?

For value to deliver, at some point, interest rates have to go up. If interest rates remain at zero globally, we believe that growth may make a comeback. One of the reasons for value to work of late was on account of a phase where investors felt that liquidity could be withdrawn sooner than later. So, if there is no normalization of monetary policy anytime during 2021 or 2022, growth will be back in spotlight. Having said that, incipient inflation is increasingly becoming visible across many areas as can be seen through prices of commodities (energy, metals, agricultural commodity, US homes, etc), all of which have seen a sharp spike. However, the Fed believes this is due to transient reasons. On the other hand, sustained rise in prices mean that interest rates have to go up, that generally is supportive of value stocks. And you can see that today, for example, there is a shortage of semiconductors, which has resulted in many auto stock companies shutting down in September all this is a reflection of covid creating supply shocks. The supply shock, along with accommodative monetary policy, has led to a significant rise in prices. We will know whether inflation or supply shock is the only problem over the next six months to one year.

The relative valuations of large- versus mid- small-cap companies, at the end of 2019, marked a high point for large-cap stocks. Since the pandemic, mid- small-cap have recovered quite a bit; is that significant?

Small- mid-caps tend to deliver high returns over 10 or 20 years, but the risk associated with them is also much higher relative to large-caps. If an investor is ready to stay invested for such long time frames, then they should definitely consider small- mid-caps. However, the reality is that investors often are guided by past returns tend to ignore the risks associated when making investment decisions. On shorter time frames, large-caps are better placed as those companies are fundamentally robust, are cash rich, can withsteconomic problems much more comfortably than small- mid-caps.

What is happening to credit risk funds since April 2020 is a tendency to be cautious. Yield to maturity (YTM) across the board has come down. From here, do you see the economy recovering therefore credit risk delivering good returns?

We believe credit is one of the most interesting but often misunderstood categories. Investors during 2019-20 realized the risk associated with credit risk category. Currently the YTM is low in credit risk funds from a historical perspective given the market situation, investors can also consider categories such as arbitrage equity savings as YTMs have fallen. However, we believe the risk in credit risk funds is lower now since many of the riskier names have managed to raise capital.

In the current market, it seems IT stocks have led the rally have done spectacularly well. Will IT continue to have leadership?

Being a practitioner of the contrarian value investing style, IT sector currently appears fully valued to me. But my colleagues who practise growth investing believe that IT is currently one of the most favourable growth sectors can even uplift the Indian economy, like in the year 2000. According to them, IT is one of the sectors showing all the indicators of phenomenal growth. The only challenge that the sector is currently facing is that of attrition, rather than anything business related. So, IT right now fits a growth portfolio than a value portfolio.

You recently completed a 10,000 crore new fund offer (NFO). A lot of investors who came into that NFO others probably have never seen a bear market. What do you say to them?

We launched a flexi-cap fund because it has the ability to invest across market capitalizations. i.e. large, mid small. So, within the equity space, flexi-cap has the potential to invest in any segment that appears reasonable. Investors who came into the market after 2011 have not seen a sustained correction. I personally have the benefit of witnessing major falls which occurred in 1992, 1996 to 1998, 2001-02. It is why we have been constantly trying to popularize categories such as balanced advantage or asset allocation category, equity savings multi asset which will help moderate negative experience during market correction in equity. Investors must remember that equity is not a risk-free asset class, but the categories we have popularized are definitely more defensive than equity.

Besides reminding ourselves , we keep telling prominent media houses that it is wiser to popularize asset allocation defensive categories than aggressive categories when markets are high.

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