With new relief provisions put in place by the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) for homeowners and tenants facing payment defaults in coming months, mortgage servicers may feel the impact of these provisions. The CARES Act, a $2 trillion stimulus relief package passed by President Donald Trump on March 27, 2020, provides borrowers of federally backed mortgage loans a right to request mortgage payment forbearance for up to 12 months, and gives tenants of federally related properties protection from eviction. (A copy of the CARES Act is available here.)
Consumer’s Right to Request Forbearance and the Foreclosure Moratorium
The CARES Act allows residential borrowers who are facing hardship—directly or indirectly—as a result of the COVID-19 pandemic to request a monthly payment forbearance even if they are already delinquent. A borrower makes a request for forbearance by (a) submitting a request to the mortgage servicer and (b) affirming that the borrower is experiencing a financial hardship during and caused by the COVID-19 emergency.
No additional documentation is required. As long as the requests are properly made, both the first and second request must be granted by the servicer—providing borrowers with a total forbearance of up to a year of payments. The language is mandatory: “Such forbearance shall be granted for up to 180 days, and shall be extended for an additional period of up to 180 days at the request of the borrower.”
The CARES Act moratorium applies only to “federally backed mortgage loan[s],” which are defined as first or subordinate mortgage loans secured by residential (between one-family and four-family) real property, including condominiums and co-ops. More specifically, they include loans that are:
- Insured by the Federal Housing Administration;
- Reverse mortgages insured by the U.S. Department of Housing and Urban Development (HUD);
- Mortgages for American Indian and Alaska Native families and Alaska villages, tribes, or tribally designated housing entities guaranteed by HUD;
- Mortgages to Native Hawaiians guaranteed by HUD;
- Mortgages to veterans that are guaranteed or insured by the U.S. Department of Veteran Affairs;
- Rural mortgages that are guaranteed or insured by the U.S. Department of Agriculture;
- Rural mortgages that are made by the U.S. Department of Agriculture; or
- Mortgages that are purchased or securitized by Fannie Mae or Freddie Mac.
During the forbearance period, no fees, penalties, or interest beyond what would come due under the loan documents as if all contractual payments were made on time may accrue on the borrower’s account. Section 4022 of the CARES Act limits the forbearance application to the “covered period” in two places, but it does not define covered period.
Unless this omission is deemed a drafting error and is corrected, this undefined term may offer a loophole that will limit the borrower’s ability to obtain a forbearance beyond 180 days. Section 4022(b)(1) limits a borrower’s right to make its first request for a forbearance to during the covered period. Additionally, the application for a second 180-day forbearance must also be made during the covered period under Section 4022(c)(1). Section 4022 does not define covered period, whereas other sections of the CARES Act do (e.g., Section 4021(F)(II) and Section 4023(f)(5)). If the national emergency declaration for COVID-19 is terminated before the second 180-day forbearance application is due, then it may not be within the covered period.
To remedy the undefined term, the statute should either be amended to delete reference to the covered period in Section 4022, or adopt the definition of covered period supplied in Section 4023 (see discussion below). Removing the limitation will supply more relief to consumer borrowers, but doing so will also increase the burden facing servicers of federally backed loans who will have to forgo monthly payments for a full year.
Banks and mortgage services should also be aware of a foreclosure moratorium, which is in effect until May 15, 2020, except where a property is vacant or abandoned. Before May 15, a servicer may not initiate a new foreclosure, make a motion for a foreclosure judgment or an order of sale, or conduct a foreclosure sale or foreclosure-related eviction.
Multifamily Forbearance and Renters Protections
The CARES Act also provides for a forbearance for multifamily borrowers with a federally backed mortgage loan. A multifamily borrower is defined as a borrower under a residential mortgage loan that is secured by five or more dwelling units. Under Section 4023 of the CARES Act, to apply for such forbearance, the multifamily borrower must:
- Have been current on payments as of February 1, 2020;
- Have a hardship that may result directly or indirectly from the COVID-19 emergency;
- Make the request to the servicer orally or in writing; and
- Affirm that the hardship is during the COVID-19 emergency.
Although the CARES Act does not outline specific documentation requirements, the servicer must document the financial hardship and grant the forbearance “for up to 30 days.” The servicer must also extend the forbearance period for “up to 2 additional 30 day periods” if made by the multifamily borrower during the covered period and at least 15 days prior to the end of the existing forbearance period. Unlike the undefined terms in Section 4022 of the CARES Act concerning consumer mortgages, the terms of Section 4023 define the covered period as beginning on the enactment of the CARES Act and extending until the earlier of the termination by the president of the COVID-19 national emergency or December 31, 2020.
Moreover, tenants at the multifamily property are protected from eviction since, during the forbearance of a federally backed multifamily mortgage, multifamily borrowers may not evict or initiate eviction proceedings solely for nonpayment of rent or charge any late fee, penalty, or other charge for the late payment of rent.
A federally backed multifamily mortgage is defined as a loan secured by residential real property designed for five or more families and made or “insured, guaranteed, supplemented, or assisted in any way” by any federal agency in connection with a HUD-administered program or purchased or securitized by Freddie Mac or Fannie Mae.
Potential Impacts on the Residential Mortgage Servicing Industry
Mortgage servicers may feel the effects of this forbearance program. Already overwhelmed by trying to manage their own organizations in a COVID-19 market, these mortgage services may be on the hook for the missed mortgage payments. Under many servicing agreements, the servicer may still be required to remit principal and interest payments to the mortgage owner even if the borrower is not making payments.
For example, under the Fannie Mae servicing guidelines, the servicer must continue to remit payment until a mortgage is “reclassified.” The mortgage will generally not be reclassified until it has at least three months of payments past due. Thus, for at least this period and unless servicers reach an agreement with the mortgage owner, servicers may be forced to make three months of payments to the mortgage owner. This is in addition to the generally escrowed payments for taxes and insurance that must also be covered by the servicer.
Normally, servicers have the capital reserves to make these payments when some of their borrowers default. However, with the wave of defaults forecasted, the financial strain on servicers will be unprecedented.