Suspension of loan payments during coronavirus produces mixed results

Jim Curran in Malvern, Pa., Lost his job in March and was granted permission to suspend his mortgage payments, freeing up thousands of dollars a month, without hurting his credit rating.

Patricia Orndorf in St. Louis Park, Minnesota, also lost her job in March. Her bank allowed her to temporarily skip her credit card bill, which had a minimum monthly payment of around $ 100, until July. But interest was still accruing, and late fees for August, September, and October were added to her balance.

The federal government helped millions of Americans during the first months of the pandemic by allowing them to defer payments, with little negative effect, on mortgages and student loans, two markets in which it exerts considerable influence. . But the government’s reach does not extend to credit card loans, auto loans, or personal loans, and borrowers with these forms of debt have found themselves with far less relief.

As a result, federal debt relief has been more beneficial to homeowners and college graduates, many of whom entered the recession with relatively good financial standing. Low-income workers, who are more likely to hire and not have a college degree, saw fewer benefits. Other programs, including expanded unemployment insurance, were more useful for low-income workers.

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Deferral programs, on an unprecedented scale, are credited with temporarily keeping the economy afloat. But the divergence in the way programs play out reflects that the tools used to restart an economy are generally blunt and can have unintended effects.

Deferral programs to halt mortgage or student loan repayments were spelled out by the Cares Act, the $ 2 trillion stimulus package passed in March, and shaped by increased government involvement. This made them easier to obtain and more generous and flexible. For example, mortgage managers have been told to allow borrowers to withhold payments for a period of up to a year if their loans are government guaranteed, and there are rules to prevent borrowers from being obliged to repay all missed payments at once. Federal student loan deferrals are granted automatically, with no accrued interest, until December 31.

Deferral programs for credit cards, auto loans, and personal loans, on the other hand, were left to lenders and often decided on a case-by-case basis. Many lenders have given customers two to three months of relief before forcing them to start paying again. Some ask borrowers to repay their missed payments in a lump sum.

This recession has already been the hardest for low-income workers, as jobs like barista, waiter and housekeeper are hard to do during a pandemic.

Homeowners, who can take advantage of mortgage relief programs, usually already have stronger finances. (The median homeowner’s family net worth was $ 255,000 in 2019, according to the Federal Reserve, compared to $ 6,300 for renters.) And those with student loans tend to have college degrees, which usually equates to higher earning power.

The Federal Reserve Bank of New York found that most Americans did not qualify for assistance from the Cares Act mortgage and student loan programs. About 63% of borrowers have neither student loans nor mortgage debt, according to the New York Fed. Instead, they have debts like credit cards and car loans.

About 72% of borrowers in low-income areas have no mortgages or student debt, according to the New York Fed.

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Consumers in high-income, predominantly white neighborhoods were more likely to benefit from the Cares Act mortgage relief, the New York Fed said. Residents of these areas are more likely to have a mortgage and higher monthly payments.

“If you try to take the strain off households by banning mortgage payments, you’re going to disproportionately target households that have higher incomes and are white households,” said Andrew Haughwout, senior vice president of the New York Fed. .

More than $ 100 million in consumer loans were deferred or under some other type of relief in May, according to credit reporting firm TransUnion. This number decreases as people leave the programs, voluntarily or not.

Banks say most credit card customers who signed up for deferrals were re-making payments when they left aid programs. Card issuers Capital One Financial Corp. and Discover Financial Services said 12% of card accounts and about 25% of card balances, respectively, that left the postponement were late in September. Synchrony Financial said about 34% of deferred or closed accounts did not make a payment as of September.

Still, that represents at least the hundreds of thousands of people who can’t make their payments, and the timing couldn’t be worse. Many are on the verge of exhausting their unemployment benefits and unemployment claims have risen sharply in recent weeks with the increase in coronavirus cases.

Mr. Curran, the man from Pennsylvania, asked his two mortgage lenders – Wells Fargo & Co. and Citadel Credit Union – if he could suspend payments after losing his job as a revenue manager at a software startup. The lenders granted him three-month abstentions.

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About six weeks later, he landed a job as a manager at a local logistics company. He quickly started making payments again and tapped into his savings to repay the missed payments to Wells Fargo, more than $ 7,000 in total, by September.

The Cares Act requires mortgage companies to report borrowers as current even when they are forborne, which has protected Mr Curran’s credit rating. This fall he refinanced at a much lower rate which reduced his payments to $ 2,200.

Mr. Curran, 51, plans to use the savings for his retirement accounts and college funds for his two high school-age children.

The tolerances, he said, gave him a break “to reset and figure out how to maintain the cash flow without having to dive into all the savings or break into retirement.

Ms Orndorf, the Minnesota woman, started a new accounts receivable job for a upholstery wholesaler in February. She hoped it would help her get her finances in order. Ms. Orndorf, 54, had spent years caring for her mother full-time and owed about $ 30,000 in credit card, car and student debt.

Instead, Ms Orndorf fell ill – she believes she had the coronavirus – and lost her new job the following month.

His student loans were already deferred before the pandemic. BMO Harris Bank suspended its auto loan in April.

Her biggest credit card balance, around $ 3,500, was with Synchrony. The bank suspended her payments until July, then told her she had to start paying around $ 100 per month. Ms Orndorf couldn’t afford it and missed three payments. Her credit rating went from about 730 to 620. Her balance fell to about $ 3,950 because of interest charges and late fees.

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A spokesperson for Synchrony said the bank “is committed to being sensitive to the situation of customers regarding the pandemic health crisis.” The company ended its pandemic relief program in October, but continues to provide several forms of assistance, she said.

Mrs Orndorf is still out of work. To help pay her monthly rent of $ 1,059, Ms. Orndorf dove into her Roth IRA. She also made and sold masks. BMO Harris allows him to make half a payment on his car loan every month, for now.

In October, after months of trying, Ms Orndorf received unemployment benefits. She called Synchrony to offer to make a payment and was told her card had been closed.

Ms Orndorf has agreed to a settlement that will forgive her about 40% of her balance if she makes three monthly payments of $ 790. She plans to use her unemployment benefits to pay.