Simply put, a forbearance agreement is a legal agreement between a lender and a borrower with terms to temporarily postpone mortgage repayment. The agreement is normally made as a form of payment relief to avoid the losses generated by property foreclosure from falling on the lender.
The hesitancy towards forbearance agreements most often comes from the loan services that are responsible for collecting payments, but do not necessarily own the loans. The financial risk for them is less, and as a result they are less likely to agree to the terms of a forbearance agreement.
Benefits of a Forbearance Agreement
The direct benefit of a forbearance agreement is given to the borrower who is struggling to make payments. It does, however, also benefit the lender. Foreclosure can be an excessive loss, and this would typically fall on the shoulders of the lender. A forbearance agreement decreases this likelihood by allowing the borrower more time to make payments. This extension is not a long-term solution, but rather a source of relief in unexpected financial strife due to the likes of sudden unemployment, or health problems.
The agreement gives the lender and borrower additional time to discuss a more permanent repayment solution. The borrower is also granted additional time to work out any issues with collateral that may increase the chance of an alternate solution. In addition, the lender is given the opportunity to amend any unclear issues in the repayment agreement.
A forbearance agreement is an alternative to declaring a borrower in default. Not all financial situations may lend themselves to a forbearance agreement, but when the lender and borrower are in agreement and cooperative, it can be a valuable tool. It gives the lender an opportunity to amend the underlying loan document so that additional terms can be added to protect the lender and give the them more control in certain situations. It is important that the borrower acknowledges and commits to the updated terms.
How Does a Forbearance Agreement Work?
Forbearance agreements acknowledge the borrower’s defaults and set terms under which the lender will restrain from pursuing legal action, understanding that the borrower adheres to the modified terms. The terms of the underlying loan documents are incorporated into the forbearance agreement.
Although a lender may lose certain rights, they will also receive certain benefits. For example, they can add a requirement that the borrower makes certain admissions in the agreement or waive certain rights.
It is important to note that a forbearance agreement differs to a loan modification agreement of which the latter is a permanent solution to unaffordable monthly repayments. This would typically be done by altering the interest rate or extending the length of the loan term.
What Should be Included?
Each situation is different and requires different specifics. Here are a few general items that a lender may want to include in a forbearance agreement.
- A list of all obligations,
- A list of collateral that is used to secure the obligations of the borrower,
- A condition that the forbearance agreement identifies definitive defaults under the operative loan agreements,
- A confirmation of the borrower’s financial (and non-financial) obligations,
- A termination date,
- A waiver of defenses against the lender,
- A compilation of events that could be considered as ‘events of default’ under the agreement.
For a forbearance agreement to be beneficial for both parties, the contract needs to be drafted up properly. It improves the chances of a loan getting paid back, and better protects the lender in the situation of litigation. Contacting a law firm that specializes in forbearance agreements will ensure that you are protected and that the agreement is used to its full advantage.