What is forbearance? Definition and examples
In finance, forbearance is a special agreement in which the lender delays a foreclosure. With a forbearance, the lender and borrower have come to an agreement, i.e., an arrangement. In most cases, the lender gives the borrower time to catch up with the repayment schedule.
A foreclosure occurs when the lender seizes a borrower’s asset because the borrower failed to keep up repayments.
The verb ‘to forbear’ means ‘to hold back,’ i.e., to patiently restrain from doing something. Therefore, forbearance is a ‘holding back.’
How long the lender gives the borrower in an agreement varies. Neither party wants the loan arrangement to fail. The borrower, if its a mortgage, does not want to lose the property. The lender, on the other hand, prefers not to have to seize the property.
Whether or not the lender grants more time depends on the borrower’s likelihood to be able to catch up with repayments.
If it looks like just a temporary setback for the borrower, the lender will probably forbear.
The lender may grant the borrower a full moratorium, i.e., stop payments altogether for a while. It may, on the other hand, insist that the borrower keeps the interest payments going.
Alternatively, the lender may reduce the interest rate on the loan for a specific period.
Regarding a borrower’s chances of getting extra time from the lender, Wikipedia writes:
“Borrowers in short-term financial difficulty would be more likely to be approved of either a (short term) full moratorium or negative-amortizing deal than customers in long-term financial difficulty.”
Forbearance is not only applicable in situations with a lender and borrower. We can use the term in any situation in which one party refrains from exercising their legal right.
Legal-Dictionary.TheFreeDictionary.com has the following definition of the term:
“Refraining from doing something that one has a legal right to do. Giving of further time for repayment of an obligation or agreement; not to enforce claim at its due date.”
“A delay in enforcing a legal right. Act by which creditor waits for payment of debt due by a debtor after it becomes due.” The debtor is the person or entity that owes money.
Forbearance – breathing space
Forbearance gives the delinquent borrower time to repay, i.e., breathing space. Delinquent, in this context, refers to a situation in which the borrower is late in paying back money.
Struggling borrowers welcome the additional time. So do the lenders because foreclosures usually mean the loss of money.
Video – What is forbearance?
This Tampa Mortgage Crisis video came out in 2009, just after the Global Financial Crisis. Sylvia Alvarez, Executive Director at Housing & Education Alliance, Inc., explains the meaning of forbearance.
She begins by telling us that many people confuse the term with ‘forgiveness,’ which has a different meaning.