Navigating the Residential Mortgage Landscape During COVID-19: What Lenders and Servicers Should Know About The CARES Act

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On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was signed into law. Among other things, the CARES Act allows residential mortgage borrowers with federally-backed loans to obtain a forbearance of up to 180 days, which may be extended by an additional 180 days if requested. In this Legal Update, we briefly summarize the legislation’s effect on lenders and servicers.

What is a “federally-backed” mortgage under the CARES Act?

Consumers who have a federally-backed mortgage loan may request relief in the form of a forbearance. The CARES Act defines a “federally backed mortgage” as one that is secured by a first or subordinate lien on residential real property, including individual units of condominiums and cooperatives, designed principally for the occupancy of one- to four-families that is:

• Insured by the Federal Housing Administration (FHA) under title II of the National Housing Act
• Insured under the National Housing Act section 255, which addresses home equity conversion (i.e., reverse) mortgage loans insured by the FHA;
• Guaranteed under the Housing and Community Development Act of 1992 sections 184 or 184A, which address loans related to Native American families and housing authorities and loans related to Native Hawaiian families and authorities;
• Guaranteed or insured by the U.S. Department of Veterans Affairs (VA);
• Made, guaranteed or insured by the U.S. Department of Agriculture (USDA); or
• Purchased or securitized by the Federal Home Loan Mortgage Corporation (Freddie Mac) or Federal National Mortgage Association (Fannie Mae).

What relief is being provided for borrowers for residential mortgage loan payments for single- to four-family properties (including individual units of condominiums and cooperatives)?

The CARES Act provides relief to borrowers of federally-backed mortgages in the form of a forbearance, i.e. a temporary postponement of mortgage payments. During the covered period, a borrower with a federally-backed mortgage loan who is experiencing a financial hardship as a result of COVID-19 may request a forbearance of up to 180 days by affirming that he or she is experiencing a financial hardship due to the COVID-19 national emergency. If needed, the borrower can request an extension for an additional period of 180 days. No further documentation or proof is required. Should the borrower wish to shorten or halt the forbearance period, he or she may do so by contacting the servicer. During the forbearance period, a servicer may not assess fees, penalties or interest, that would not have been charged to a consumer if he or she made timely payments under the terms of their mortgage contract. If a servicer or lender makes an accommodation under the CARES Act, it must, as a furnisher, continue to report the account as current if the consumer fulfills the terms of the accommodation under Section 4021. However, if an account was delinquent before the accommodation was made, the furnisher is permitted to continue reporting the account as delinquent unless the account is brought current. The reporting requirements under § 4021 apply to consumer accounts between January 31, 2020 through 120 days after the end of the COVID-19 national emergency.

What relief is being provided for residential mortgage loan payments for multifamily-properties?

Similarly, § 4023 of the CARES Act provides relief for “federally backed multi-family borrowers” which it defines as “a borrower of a residential mortgage loan that is secured by a lien against a property comprising 5 or more dwelling units.” Unlike § 4022, there is no moratorium on foreclosures of these mortgages, which include any first or second mortgage loan secured by a lien on a property comprised of 5 or more dwelling units and is made or insured, guaranteed, supplemented or assisted in any way by any officer or agency of the Federal Government or under or in connection with a housing or urban development program administered by the Secretary of Housing and Urban Development or any such agency. It also includes such mortgages that are purchased or securitized by Freddie Mac or Fannie Mae. Multi-family borrowers may request a forbearance either orally or in writing, triggering a duty by the servicer to document the hardship and provide an initial 30-day forbearance. The forbearance may be extended for up to 2 additional 30 day periods, upon request by the borrower during the covered period and at least 15 days before the expiration of the initial 30 day forbearance. The “covered period” is defined as the date on which the CARES Act became law (March 27, 2020) until the sooner of December 31, 2020 or the termination date of the COVID-19 national emergency. Multi-family borrowers are prevented from charging late fees or penalties or evicting any tenants for non-payment of rent during the forbearance period, and upon completion of the forbearance must provide all tenants with a 30 day notice prior to requiring a tenant to vacate. As discussed above, there are consumer credit reporting protections. If a servicer or lender makes an accommodation under the CARES Act, it must, as a furnisher under the FCRA, continue to report the account as current if the consumer fulfills the terms of the accommodation under Section 4021. However, if an account was delinquent before the accommodation was made, the furnisher is permitted to continue reporting the account as delinquent unless the account is brought current. The reporting requirements under § 4021 apply to consumer accounts between January 31, 2020 through 120 days after the end of the COVID-19 national emergency.

What is the “covered period” under § 4022 of the CARES Act?

Unlike Section 4023, § 4022 of the CARES Act does not define the “covered period.” Prior drafts of § 4022 contained a definition of covered period that was identical to § 4023, but it was struck from the final text.

May lenders proceed with foreclosures and evictions?

The CARES Act provides that, except for a vacant or abandoned property, a servicer of a federally-backed mortgage loan may not initiate or advance foreclosure proceedings, or execute a foreclosure-related eviction, for a period of not less than the 60-days beginning on March 18, 2020. Note that many states have taken similar, and in some cases more restrictive, steps through executive or judicial orders or through legislation. Please click here for a summary of this information.

Takeaways and Considerations

Some common questions that we have received based on early readings of the text of the CARES Act include the following:

1.  How should the “covered period” for federally-backed loans on single-family properties be construed?

In light of Congress’ striking of the definition for “covered period” in § 4022 but not § 4023, lenders and servicers should proceed cautiously .

2.  Who foots the bill for the borrowers’ missed payments during the forbearance period?

The CARES Act does not include monetary relief, either for borrowers or for the mortgage industry. The Act just suspends the borrowers’ obligations to make their payments to their mortgage servicers during the forbearance period, while saying nothing about the concomitant obligations that the servicers may have to the investors of the mortgage loans and other interested constituencies. Congress is being lobbied to enact subsequent legislation aimed specifically at the mortgage industry to address additional funding and/or lending programs to avoid substantial financial damage to the industry.

3.  What happens to federally-backed residential mortgage loans after the forbearance period expires?

The CARES Act does also not provide for what happens upon the termination of the forbearance period. In the absence of additional bailout legislation, it is a reasonable assumption that a significant percentage of the borrowers who availed themselves of the forbearance relief will be unable or unwilling to immediately pay their arrearages that had accrued during the forbearance period. At that point, they would be in default under their mortgage contracts, with up to a year of missed payments. Traditionally, mortgage defaults of long duration have been dealt with through voluntary modifications, or foreclosures. There is nothing traditional about the COVID-19 crisis. Additional bailout legislation is a possibility but not a certainty.

4.  What about non-federally-backed residential mortgage loans?

While these residential mortgage loans are not subject to the CARES Act, they are nonetheless subject to the inter-agency guidance issued by the Consumer Financial Protection Bureau, the Federal Deposition Insurance Corporation, the Federal Reserve Board, the National Credit Union Association, the Office of the Comptroller of the Currency, and the Conference of State Bank Supervisors, encouraging financial institutions to work prudently with borrowers who are unable to make payments due to the effects of COVID-19.

The Consumer Financial Services team at Seyfarth Shaw is following these and all other consumer debt collection issues closely in the wake of COVID-19. We will be hosting a series of webinars regarding them.  The first webinar will take place this Wednesday, April 8th.  For more information and to register, click here.

We invite you to join us for these webinars and to reach out to us directly.