THE NEAR FUTURE OF FORBEARANCE

THE NEAR FUTURE OF FORBEARANCE

By MICHELLE GARCIA GILBERT, GILBERT GARCIA GROUP P.A.

Beginning March 27, 2020, when President Trump signed the CARES Act into law, a moratorium, now extended through January 31, 2021, was placed on foreclosures and evictions for loans owned by Fannie Mae and Freddie Mac, and now extended through February 28, 2021 for VA, FHA and USDA loans, affecting about two-thirds of the single-family residential lending market.

The Federal Housing Administration, the U.S. Department of Veterans Affairs, the Department of Agriculture, Fannie Mae and Freddie Mac issued foreclosure and eviction moratoria that cover households living in properties insured or guaranteed by these agencies, which cover about 70 percent of all outstanding mortgage holders, or 33.4 million homeowners. Homeowners with fully private mortgages held by banks or private investors, about 14.6 million homeowners, were not covered.

In addition to the moratorium, the CARES Act provided 180 days forbearances to borrowers of these federally held/insured loans, upon request by the borrower, with the availability of an additional 180-day forbearance.

Generally, forbearance encompasses the reduction or suspension of a borrower’s contractual payment for a specific period of time, as well as suspension of foreclosure activity. Historically, servicers follow previously determined guidelines for allowing forbearances and workout options.

Under the CARES Act, servicers of federallybacked single family mortgages are required to provide forbearances to borrowers who affirm they suffered financial hardship during the COVID-19 pandemic, not necessarily due to the pandemic. Upon receiving this forbearance request from a borrower, a servicer must grant the request, with no additional documentation required. Anecdotally, servicers accept any attestation of a COVID-19 related hardship provided verbally or in writing.

Servicers of privately owned loans have mirrored this CARES Act standard, though they may request additional documentation. Overall, a standard pandemic approach avoids risk of disparate treatment claims and adverse publicity.

Furthermore, the CARES Act moratorium makes enforcement of these loans almost impossible during “covered period” running from January 31, 2020 through later of 120 days after enactment on March 27, 2020 or 120 days after corona virus national emergency terminates.

PRESENT STATE OF FORBEARANCES

Borrowers may request forbearance regardless of whether they were in default prior to the pandemic, and those requests must be honored under the prevailing interpretation of the CARES Act. Notably, borrowers already in a foreclosure process are not specifically excluded under the Act, so servicers have stayed pending cases upon request, which is more problematic.

COVID-19 forbearances bump up against CFPB loss mitigation and Fair Credit Reporting Act (FCRA) rules too. The CFPB’s complete/incomplete loss mitigation application and short-term forbearance rules require servicers to take certain actions to acknowledge or complete an application. Servicers are required to send notice to borrowers within five days confirming receipt of an application and lack of documents, if any, along with providing a deadline by which additional documents are due.

The rules also prohibit a servicer from offering loss mitigation based upon an incomplete application, except for a short-term forbearance plan. In theory, the CARES Act does not violate this CFPB rule, because the act requires that 180-day successive forbearance plans be provided upon borrowers’ requests, but forbearance plans should not exceed the six-month period allowed by the CFPB.

The CARES Act added requirements under the FCRA that require a servicer to report a current forbearance as “current,” but to continue to report a prior delinquent account now in forbearance as “delinquent.” As credit reporting is not mandatory, the requirement to report seems to put servicers at risk, so best practice is to review current guidance form the CFPB about whether to note a COVID-19 forbearance.

NEAR FUTURE—WHAT HAPPENS NEXT

As of mid-January 2021, there are approximately 2.74 million loans, 5.2 percent of all mortgages, representing $547 billion in unpaid principle, in forbearance, down 92,000 loans from the first week in January, 2021.

Typically, forbearance industry standards require borrowers to repay the forborne amounts as lump sum at end of forbearance period, or agree to some type of loss mitigation, such as reinstatement, repayment plan, payment deferral with a partial claim, and loan modification.

Investors and insurers owning almost two-thirds of the residential mortgage market established workout options during the pandemic. On April 1, 2020, FHA announced its COVID-19 National Emergency Standalone Partial Claim, where borrowers can defer repayment of forborne amounts through interest-free subordinate mortgage which is due when first mortgage is due. On May 13, 2020, Fannie Mae and Freddie Mac announced similar programs which allow servicers to defer up to 12 months of delinquent mortgage payments to the end of the loan.

Each of these programs has certain eligibility requirements, for example, they generally require that the mortgage is current or less than 30 days past due as of March 1, 2020, the borrower has the ability to resume making on-time payments, and the property is owner occupied. These investors/insurers seem to have loosened the documentation required to qualify borrowers too, requiring mostly proof of income, but guidance is inconsistent. Servicers for these investors must complete timely outreach with borrowers in forbearance and must follow a COVID-19 specific and lengthy loss mitigation hierarchy developed by investors/insurers late spring and early summer, 2020.

Servicers of all mortgages also must comply with CFPB/Regulation X’s anti-evasion clause which limits the loss mitigation options that can be offered with an incomplete loss mitigation package. Recognizing the unprecedented nature of pandemic mortgage forbearances, the bureau issued an interim final rule on COVID-19 related loss mitigation options which gives servicers more flexibility with COVID-19 relief options.

This interim rule excuses servicers from continuing with an incomplete package process if a borrower accepts a workout option that is consistent with COVID-19 payment deferral, limited only to deferral and partial claim workouts, but not to loan modifications.

LATEST NEWS

President Joe Biden proposes extending foreclosure and eviction moratorium until September 30, 2021. Coming into the end of 2020, servicers struggled with credit reporting issues as well as the interplay between investor/insurer COVID-19 new rules and CFPB loss mitigation requirements. Servicers continue to navigate federal, state, and investor/insurer requirements to determine best options for borrowers while offering these options legally and efficiently. The jury is still out about how all of this will end, even while nondefault servicing continues alongside increased default servicing, due to increased originations caused by low interest rates.

Given the low interest rate environment, many people have chosen to refinance their mortgage or purchase a new home. Some borrowers were concerned if they requested a loan forbearance, they may not be able to take advantage of lower interest rates. Fannie Mae, Freddie Mac, and HUD put out guidance that after three consecutive payments post-forbearance, consumers are eligible to buy a new home and are eligible for some types of mortgage refinances.

As mentioned earlier, given that almost two-thirds of residential mortgages in the United States are owned or insured by federal institutions (Freddie, Fannie, FHA, VA, USDA), there may be uniform relief stemming from the COVID-19 crisis forbearances and workouts. Coupled with increasing property values and low interest rates, the long-term impact on mortgage servicing and the housing market may turn out to be better than expected.