Forbearance is a formal agreement in which a lender temporarily refrains from exercising its remedies, such as accelerating the loan, foreclosing or charging default interest, even though the borrower is in technical default. It does not forgive the default or reduce the debt; it pauses enforcement for a defined period while the borrower resolves the underlying issue.
What does the borrower give up in a forbearance agreement?
In exchange for the pause, the borrower agrees to specific conditions: partial payments, enhanced financial reporting, an injection of additional equity, or milestones toward a resolution such as a refinance or a property sale. The key provisions to negotiate are the duration, the conditions that terminate the forbearance, whether default interest accrues during it, and whether the borrower acknowledges the default, which affects future legal remedies.
Forbearance is distinct from a loan modification, which permanently changes the loan terms. Forbearance leaves the terms intact and changes only the timing of enforcement.
How does the forbearance process work?
Forbearance is a critical tool for borrowers facing a maturity default, a covenant breach or a short-term cash flow disruption. The process begins with the borrower approaching the lender before the default event, presenting a clear plan for resolution. Lenders are more receptive when the borrower is transparent, the property fundamentals are sound and the plan is credible.
For CMBS loans, forbearance runs through the special servicer rather than the original lender, and the process is more formal and slower. Understanding forbearance options before they are needed gives a borrower negotiating leverage when it matters most.
Frequently Asked Questions
Is forbearance the same as a loan modification?
No. A loan modification permanently changes the loan terms. Forbearance leaves the terms in place and pauses the lender’s enforcement rights for a defined period; the agreement itself neither forgives nor cures the default.
Does interest keep accruing during forbearance?
Forbearance does not reduce the debt, and whether default interest accrues during the forbearance period is one of the key provisions to negotiate in the agreement.
When should a borrower ask for forbearance?
Before the default event, with a resolution plan in hand. Lenders respond best to a transparent borrower with sound property fundamentals and a credible path to a refinance or sale.
Related Terms
- Covenant
- Maturity Date
- CMBS
- The Maturity Wall: A Refinancing Workflow Playbook for CRE Debt Teams
- Loan Critical Date Tracking: Maturities, Extensions, Cap Replacements and Everything Else
- Commercial Loan Modification: Workouts, Special Servicing
Part of the LoanBoss CRE Debt Glossary. For hedging-specific terms, see Pensford’s resources.
Sources
- LoanBoss CRE Debt Glossary