This article was originally published in the NAGTRI Center for Consumer Protection Monthly newsletter.
In March 2020, only 3.6% of mortgages were in some form of delinquency1; only 1.2% were seriously delinquent,2 (the lowest level since June of 2000), and only 0.4% of loans were in some stage of the foreclosure process, which was the lowest level in 21 years.3
This good news came to a screeching halt with COVID-19. Virtually overnight, large segments of the United States economy shut down in order to deal with this serious health threat. Very early on it was recognized that many borrowers would have difficulty making their mortgage payment due to this unprecedented and sudden economic disruption. Even more unique was the public health need for Americans to shelter in place and socially distance from others. These circumstances demanded a swift public policy response to help ensure that homeowners were not dispossessed of their property during a pandemic.4
The last foreclosure crisis began slowly and built over time as the economic disruption (which later became known as the “Great Recession”) became broader and deeper. What started with subprime loans later moved into the Alt-A, jumbo and prime markets. In this way, the last crisis was similar to a rising flood. COVID-19 is more akin to a tidal wave; all of the impacts came suddenly and at the same time.
At the very beginning of the Great Recession, the mortgage servicing industry engaged in very little loss mitigation for delinquent borrowers. Accordingly, every consumer protection advance was fiercely contested. In the background was a robust debate over the supposed moral hazards of granting borrowers loan modifications that either reduced the monthly payment amount, extended the loan term, or even reduced loan principal. Eventually, mortgage servicers and the investors who owned the loans came to realize that it was generally the better economic decision to take a smaller financial return than originally anticipated and keep borrowers in their homes when possible rather than suffer larger losses from a foreclosure sale.5 Because of this long-running debate over the necessity and efficacy of large scale loss mitigation several crucial years were lost resulting in many thousands of avoidable foreclosures taking place.
In stark contrast, the policy response to COVID-19 has been startlingly swift. On March 13, 2020, President Trump declared a national emergency in response to the coronavirus outbreak.6 On March 27, 2020, a mere two weeks later, Congress passed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act).7 Section 4022 of the CARES Act provides two areas of significant mortgage relief for certain borrowers: forbearance and a foreclosure moratorium.
Importantly, the CARES Act only applies to borrowers with a “federally backed mortgage loan.” 8 This is defined to include loans: 1) insured by the Federal Housing Administration (commonly known as “FHA” which is part of the Department of Housing and Urban Development or “HUD”) including reverse mortgages,9 2) guaranteed by HUD under specific programs designed to support homeownership for Native Americans10 and native Hawaiians,11 3) purchased or securitized by the Federal Home Loan Mortgage Corporation or the Federal National Mortgage Association (commonly referred to “Freddie Mac” and “Fannie Mae” ),12 4) guaranteed or insured by the Department of Veterans Affairs (VA), and 5) guaranteed, insured, or made by the Department of Agriculture.13 It is estimated that approximately 70% of mortgages in the United States are “federally backed.”14 The other 30% of the mortgage market are loans held in bank portfolios and in private label securities (“PLS”).
The CARES Act provides that servicers “may not initiate any judicial or non-judicial foreclosure process, move for a foreclosure judgment or order of sale, or execute a foreclosure-related eviction or foreclosure sale for not less than the 60-day period beginning on March 18, 2020.”15 There is an exception for vacant and abandoned property. Like all things CARES Act-related, this moratorium only applies to federally backed mortgages, although many states have also implemented their own foreclosure moratoriums. Importantly, both the Federal Housing Finance Agency (“FHFA”, which is the regulator for the GSEs) and HUD have extended their foreclosure moratoriums through at least August 31, 2020. 16
Forbearance on Demand
Forbearance is a temporary pause in a borrower’s obligation to make his or her monthly payment. It is typically used for short term events such as unemployment or natural disasters. Importantly, forbearance is not forgiveness. The amount that is not paid, i.e., is “forborne,” must be paid back in some manner once the forbearance ends.
Under the CARES Act, “a borrower with a federally backed mortgage loan experiencing a financial hardship due, directly or indirectly, to the COVID-19 emergency may request forbearance …, regardless of delinquency status, by submitting a request to the borrower’s servicer; and affirming that the borrower is experiencing a financial hardship….”17 Two things stand out:
First, no documentation or written application is required to obtain a forbearance. The CARES Act makes it clear that a servicer shall provide a requested forbearance “with no additional documentation required other than the borrower’s attestation to a financial hardship caused by the COVID-19 emergency….”18 Major mortgage servicers have informed us through conversations they have interpreted this to mean that a verbal request is sufficient.19 Similarly, both the GSEs and HUD have provided guidance emphasizing the multiple and informal ways which servicers can communicate with borrowers regarding forbearance.20 For example, HUD has explained that the lender or servicer, “may utilize any available methods for communicating with a Borrower regarding a forbearance…. Acceptable methods of communication regarding a forbearance include, but are not limited to, emails, texts, fax, teleconferencing, websites, or sending out a general communication advising Borrowers that forbearance is granted provided the Borrower emails a request or calls their Servicer.”21
Second, borrowers are entitled to a forbearance “regardless of delinquency status.”22 This means that borrowers who were in default prior to the onset of COVID-19 are entitled to forbearance. These two things in combination mean that essentially anyone with a federally backed mortgage who wants a forbearance can get one, no questions asked.
In fact, the threshold for obtaining a forbearance is so low that many mortgage servicers are allowing borrowers to obtain a forbearance through self-help. Through conversations with mortgage servicers we have learned that many servicers have set up processes on their websites where a borrower can obtain a forbearance by answering just a few simple questions, without ever talking to the servicer or submitting a single document.
Equally as remarkable is the length of the forbearance granted. The CARES Act provides that “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, provided that, at the borrower’s request, either the initial or extended period of forbearance may be shortened.”23 This means that eligible borrowers have the right under federal law to forbearance for up to one year. Importantly, servicers are not required to initially offer a 180-day forbearance. This is actually a good thing, because you do not want to keep a borrower in forbearance any longer than is necessary. Conversations with the servicing industry have revealed that it is very common for servicers to offer an initial 90-day forbearance period.24
What Happens When the Forbearance Ends?
Because of the extremely low hurdles for receiving a forbearance, as of June 7, 2020, approximately 4.4 million homeowners were in forbearance, representing 8.55% of the total mortgage market.25 Obtaining a forbearance is not generally a problem. The concern is what happens on the back end when the forbearance period ends. Because of the unique impacts of COVID-19, borrowers in forbearance will need help at essentially the same time. During the last foreclosure crisis, it was apparent that the mortgage servicing industry was not equipped to handle large volumes of delinquent borrowers. This has led to concern that during COVID-19, mortgage servicers will be overwhelmed when hundreds of thousands, or even millions, of borrowers come out of a forbearance period and need a more permanent loss mitigation solution.
As either the owners or insurers of most federally backed loans, FHFA and HUD set the rules that the mortgage servicers who service their loans must follow. The options for borrowers are usually presented in a set order commonly referred to as a “waterfall.” The initial post-forbearance FHFA waterfall was as follows: 1) reinstatement (paying the entire forborne amount at once, commonly referred to as “lump sum”), 2) repayment plan (your regular monthly payment plus an extra amount to pay back the forborne amount over time), 3) various loan modification programs, and 4) non-retention options such as short sale, deed-in-lieu of foreclosure, and eventually foreclosure.26
This waterfall contemplated that the servicer would make an individualized decision for each borrower. This created concern that mortgage servicers would not have the capacity to make hundreds of thousands of individualized decisions at essentially the same time and the industry would be overwhelmed. In addition, the issue of reinstatement or lump sum repayment requests was creating a great deal of borrower confusion, if not anger. Borrowers who are in forbearance due to reduced income or unemployment because of COVID-19 are unlikely to be able to make such a lump sum payment, leading many borrowers to become extremely concerned and upset when this is presented not only as an option, but the first option. Many press articles earlier this year reported on the borrower confusion and concern being generated by lump sum repayment requests.27
These concerns led a bipartisan coalition of 35 Attorneys General to write letters to FHFA and HUD on April 23, 2020, urging them to make changes to the post-forbearance waterfall.28 While the letters contained multiple recommendations, the two primary requests were to drop the reinstatement or lump sum request in order to avoid borrower confusion and to create a post-forbearance deferral plan. A deferral plan places the missed or forborne payments at the end of the loan in a zero-interest balloon or similar mechanism. This allows borrowers who are able to resume making their regular monthly payment to do so without having to immediately repay the forborne amount.
Unfortunately, the first recommendation was not adopted and servicers are still expected to discuss lump sum repayment or reinstatement as the first option. We predict this will lead to many borrower complaints. FHFA did, however, decide to adopt a post-forbearance deferral program, effective July 1, 2020.29 This option is available to borrowers who cannot afford to pay back the forborne amount (in other words they cannot reinstate or become current through a repayment plan) but they can afford to resume their normal monthly payment. It is restricted to borrowers who were current or less than 31 days delinquent as of March 1, 2020 (thus limiting the pool to borrowers impacted by COVID) along with other eligibility requirements. If granted, the forborne amounts are placed at the end of the loan in a zero interest bearing balloon, which is due if the loan is refinanced, paid off (for example if the house is sold), or the loan reaches maturity. Up to 12 months of principal and interest payments, along with escrow disbursements can be deferred. The servicer must also waive all late charges and penalties upon completing a COVID-19 deferral.
The development of a deferral option is significant because it has the potential to efficiently help many borrowers who, due to COVID, could not make their monthly payment for a period of time, but now are able to resume their regular monthly payments. The use of a deferral program reduces the number of borrowers for whom servicers need to make individualized decisions, reducing the likelihood of servicers becoming overwhelmed.
The long-term impacts of COVID-19 on the mortgage market are simply unknown at this point. It is quite possible that the true impacts have yet to be felt or revealed. What is apparent, however, is that with regard to COVID-19 and mortgages, public policy makers have reacted in a swift and robust manner. This is a welcome departure from the half-steps that were reluctantly approved over long periods of time during the Great Recession. That failure to act earlier caused untold damage and made the last foreclosure crisis deeper and longer than it otherwise could have been. Thus far, policy makers appear to have learned the lesson that earlier and more robust policy responses can help reduce the long-term damage to the mortgage and housing markets.
- Defined as thirty (30) days or more past due, including loans in foreclosure.
- Defined as ninety (90) days or more past due, including loans in foreclosure.
- All statistics are from Weathering the Storm for Now: Mortgage Delinquencies Remain Low in March 2020 Despite Early Impacts of the Pandemic, CoreLogic Reports, https://www.businesswire.com/news/home/20200609005215/en/Weathering-Storm-Mortgage-Delinquencies-Remain-March-2020.
- For a variety of reasons, the needs of tenants during COVID-19 are in many ways significantly more acute than homeowners. Given the much shorter timeframes and lesser procedural protections, tenants are much more likely to be evicted, which has potential public health considerations. These important issues regarding tenants are beyond the scope of this article.
- During the Great Recession, home prices fell approximately 30 percent, on average, from their mid-2006 peak to mid-2009. The Great Recession, Federal Reserve History, Robert Rich, Federal Reserve Bank of Cleveland (2013), https://www.federalreservehistory.org/essays/great_recession_of_200709. Given the significant drop in home values along with the prevalence of origination fraud, when lenders foreclosed on homes during this period they often suffered significant losses.
- Proclamation on Declaring a National Emergency Concerning the Novel Coronavirus Disease (COVID-19) Outbreak, March 13, 2020, https://www.whitehouse.gov/presidential-actions/proclamation-declaring-national-emergency-concerning-novel-coronavirus-disease-covid-19-outbreak/.
- Pub. L. No. 116-136.
- Id. at Sec. 4022.
- FHA insures reverse mortgages (officially known as a Home Equity Conversion Mortgage or HECM) under section 255 of the National Housing Act.
- “Section 184 of the Housing and Community Development Act of 1992 established a loan guarantee program for Indian families, Indian housing authorities (IHAs), and Indian tribes.” https://www.hud.gov/section184.
- The Section 184A Native Hawaiian Housing Loan Guarantee Program “is designed to offer home ownership, property rehabilitation, and new construction opportunities for eligible Native Hawaiian individuals and families wanting to own a home on Hawaiian home lands.” https://www.hud.gov/section184a.
- Freddie Mac and Fannie Mae are also often referred to as “government-sponsored enterprises” or the “GSEs.”
- The formal definition is found at Sec. 4022(a)(2)(A)-(G).
- The Price Tag for Keeping 29 Million Families in Their Homes: $162 Billion, March 27, 2020, Laurie Goodman & Karan Kaul, The Urban Institute, https://www.urban.org/urban-wire/price-tag-keeping-29-million-families-their-homes-162-billion.
- Sec. 4022(c)(2).
- https://www.fhfa.gov/Media/PublicAffairs/Pages/FHFA-Extends-Foreclosure-and-Eviction-Moratorium-6172020.aspx; HUD Mortgage Letter 2020-19: https://www.hud.gov/sites/dfiles/OCHCO/documents/2020-19hsngml.pdf.
- Sec. 4022(b)(1)(A)-(B).
- Sec. 4022(c)(1).
- See Freddie Mac Servicing Bulletin 2020-4 (“no documentation is required from the Borrower in order to verify the hardship”); HUD Mortgagee Letter 2020-06, https://www.hud.gov/sites/dfiles/OCHCO/documents/20-06hsngml.pdf.
- Fannie Mae and Freddie Mac both allow servicers to offer CARES Act forbearance even if the servicer cannot establish “qualified right party contact” (“QRPC”) which is typically required before a servicer can offer a borrower loss mitigation. Examples of QRPC include: determining the reason for the delinquency, whether the hardship is permanent or temporary, and assessing the borrower’s ability to repay. Fannie Mae Lender Letter 2020-02, https://singlefamily.fanniemae.com/media/22261/display; Freddie Mac Servicing Bulletin 2020-10, https://guide.freddiemac.com/app/guide/bulletin/2020-10.
- HUD Mortgagee Letter 2020-06, April 1, 2020, https://www.hud.gov/sites/dfiles/OCHCO/documents/20-06hsngml.pdf.
- Sec. 4022(b)(1).
- Sec. 4022(b)(2).
- Also significant is that servicers may not assess any fees, penalties, or interest (beyond the regularly scheduled interest as if the forborne payments had been made on time and in full) during the forbearance period. Sec. 4022(b)(3).
- See Share of Mortgage Loans in Forbearance Increases to 8.55%, Mortgage Bankers Association, June 15, 2020, https://www.mba.org/2020-press-releases/june/share-of-mortgage-loans-in-forbearance-increases-to-855.
- Freddie Mac Servicing Bulletin 2020-4, https://guide.freddiemac.com/app/guide/bulletin/2020-4.
- See e.g. After Confusion Over Lump Sum Payments, Homeowners Finally Get Clarification On Mortgage Forbearance, Dima Williams, April 27, 2020, Forbes.com,
- HUD Letter: https://www.iowaattorneygeneral.gov/media/cms/COVID_19_Letter_to_HUD_4_34C7607DD0538.pdf, FHFA letter: https://www.iowaattorneygeneral.gov/media/cms/COVID_19_Letter_to_FHFA_4_318F51094DAA7.pdf
- FHFA Announces Payment Deferral as New Repayment Option for Homeowners in COVID-19 Forbearance Plans. May 13, 2020, https://www.fhfa.gov/Media/PublicAffairs/Pages/FHFA-Announces-Payment-Deferral-as-New-Repayment-Option-for-Homeowners-in-COVID-19-Forbearance-Plans.aspx. See Fannie Mae Lender Letter 2020-07, https://singlefamily.fanniemae.com/media/22916/display; Freddie Mac Servicing Bulletin 2020-15, https://guide.freddiemac.com/app/guide/bulletin/2020-15.