COVID-19 Forbearance & Loan Modification Capitalization?

[jdm12]

Hi guys, have any of you done a loan modification as part of a COVID-19 Forbearance program? Specifically the issue I saw was instead of charging me for late interest, the mortgage company added the principal in each missed payment as part of the principal balance for the loan. 

For example, let's say that I pay off around $200 in interest per month with each mortgage payment and let's say the mortgage payment is $1000. Instead of charging me for the $200 in interest that I did not pay with each missed payment, the mortgage company tacked on $1000 to the loan principal with each missed payment. This means that missing 1 mortgage payment "erases" 5 months worth of mortgage payments (because each mortgage payment reduces the principal balance by $200, and they add $1000 to the principal for each missed payment under the loan modification, you're effectively losing 5 months worth of payments on the principal with each missed payment).

Basically this meant that I lost about 6 years worth of mortgage payments. I think my balance 6 years ago was like $35k less. After the loan modification, I think these missed payments were capitalized and added to the balance of the loan which meant instead of just needing to pay back the interest from that time, now I have to pay for what the principal payment was supposed to be too. Imagine if you had student loan payments and instead of only the interest adding up over time, with each missed payment (say you were on forbearance during COVID-19 and didn't need to make payments) and all the missed payments get added to the balance of the loan.

[ShanetheMortgageMan]

The whole point of the forbearance was so you didn't have to make your payment while not being reported late, but the interest that was deferred was still owed.  Whether that interest you didn't pay was turned into principal or was kept at interest, the dollar amount is the same, so another way you can look at the added principal balance is the interest you didn't pay.  Most forbearance plans didn't charge interest on the deferred payments, so adding it as interest or principal wouldn't change how much you'd owe at the end, but you'll want to examine your paperwork and/or call up your mortgage servicer to be certain.

[jdm12]

Just to clarify, it was not the interest that was added to the loan principal. It was the entire missed payment that was added to the loan principal. I think it is natural to think that the amount that was added on to the mortgage was only the interest, but I am confirming here that the amount that was added onto the loan modification was the missed interest PLUS the principal payment. Said in a different way, there is no way for me to accrue $35k in interest payments from the COVID-19 forbearance program, which only defers 12 payments. There is no way that 12 payments would have accrued $35k in interest.  So just confirming that the entire missed payment itself was added onto the new principal for the loan modification. I wanted to make this clear so others would know what my situation is. That being said, has anyone gone through this situation? It seems really predatory to add the ENTIRE missed payment onto the new loan balance. I was pushed back by about 6 years worth of mortgage payments because of that.

Also, what you are referring to is a standard COVID-19 forbearance without a loan modification. At the end of my COVID-19 forbearance program was a loan modification (recommended by the mortgage company) that was done to re-issue an entirely new bank note. For example, my term went from 30 year to 40 years and my interest rate went from 4% to 2.875% after they did the loan modification.

[ShanetheMortgageMan]

Correct, I was just referring to a forbearance without modification, which usually adds an additional amount to pay off the loan and from what I've seen it just adds the interest.  I'd call up and ask why the principal portion of each payment was added onto the principal balance and not just the interest.

How much was the original balance of your mortgage?  I am calculating a $610k loan amount at 4% to have a monthly P&I payment of $2,912/mo, which over 12 months would equal just under $35k.  About $2k/mo of that is just interest.

You also have to consider your rate was lowered from 4% to 2.875%.  If you make the old 4% interest rate payment amount on the new modified loan, does it still put you behind by 6 years?  

[jdm12]

My loan amount was much smaller than $610k. My loan amount was $258k after a refinance around 2014. By 2020, I had paid down the loan principal to around $225k. Therefore, I don't believe even with interest it's going to jack up the new principal by $35k after 6 or 7 missed payments (I did not use the entire 12 month forbearance period as well). The math from 6 or 7 missed payments (might have been even less missed payments than that) doesn't quite add up and it also makes me think the loan origination fee might have been included as well into the new principal. After the loan modification, it added $35k and my new principal was $260k. I'll definitely call them up and see what happens. Was trying to get a bit of research in before going into a call with them. I actually also asked ChatGPT and it suggested that they must have capitalized the loan including the missed principal payment. It said that when a mortgage company does that, it's their responsibility to inform the customer of such. Since they did not make it clear to me, and I only found out once I saw that the loan amount sky rocketed that much, that ChatGPT suggested it was loan capitalization on the missed interest plus would-be the principal payment from each payment that was added onto the new principal. Yikes

[jdm12]

The loan modification all unfortunately even happened in the first place because the mortgage company mislead me on the amount of payments that were deferred by the COVID-19 forbearance (the mortgage company admitted on the phone call they gave me bad information that lead to the negative consequence but also said they could do nothing about it. They even said sorry but I told them a sorry doesn't really change anything or the large bill for me). They deferred a few months and then said I needed to pay for another chunk of payments on top of that which we not covered by the forbearance (it wasn't entirely clear as to why). That's why I was faced with a lump sum payment to make of around $12-16k if I remember correctly. It's been so long that I am going off of just rough numbers. I remember thinking that I could just have them factor that into the new loan instead of paying for that lump sum, which I was actually capable of doing after I got out of my mess. Looking back, I sure would have done a $12-16k payment if it meant not getting my loan amount to sky rocket from $225k to $260k.  Had I just paid the $12-16k, my loan amount would be close to the low 200's at this point instead of past mid-200's. Was super sad when I realized that happened. I heard from asking ChatGPT that I can call up an organization that helps consumers with these kind of things, but it feels like a long shot for anything to happen at this point. 

[ShanetheMortgageMan]

I'd request a breakdown of what was added to the mortgage balance because with a $225k loan amount I can't see how it'd add $35k to your balance for 12 months (let alone for less time than that).  If you aren't satisfied with the lender's response you can file a complaint through the CFPB and the lender/servicer has 30 days to respond.