One Month In – Updates on Mortgage Relief Efforts and Guidance

It’s been a month since the Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law. Although much of the focus and public scrutiny has been on small business relief, the number of mortgage borrowers requesting and receiving payment forbearance pursuant to the CARES Act, or otherwise, has continued to rise.

This post provides updates on Department of Housing and Urban Development (HUD), government-sponsored enterprises (GSEs), and CFPB guidance to lenders and servicers providing COVID-19 related relief, as well as some states’ attempts to expand protections to borrowers whose mortgage loans are not covered under the CARES Act.

As of April 23, 2020, 6.4 percent of all U.S. mortgage loans have entered forbearance, including 5.6 percent of GSE-backed loans like Fannie Mae and Freddie Mac, 8.9 percent of Federal Housing Administration (FHA) and Department of Veterans Affairs (VA) loans, and 5.7 percent of private label loans. The 6.4 percent figure is up from 5.5 percent as of the prior week.

At current forbearance levels, mortgage servicers would need to advance an aggregate of $2.8 billion in principal and interest payments per month to investors in government-backed loans receiving COVID-19-related forbearances. Even with FHFA’s recent announcement that GSE-backed loans would only be subject to these requirements for four months, state regulator and industry calls for a mortgage-loan servicer liquidity facility have not abated.

Meanwhile, the Consumer Financial Protection Bureau (CFPB) has been subject to criticism from consumer advocates, including from former CFPB Director Cordray and members of the Senate Banking Committee, for its response to the pandemic. Critics claim the CFPB has focused more on providing flexibility to financial institutions than protections for consumers. Nonetheless, the CFPB and the Federal Housing Finance Agency (FHFA), the GSEs’ regulator and conservator, have announced a joint borrower protection initiative (as discussed below).

DWT continues to follow these legal developments affecting the mortgage lending and servicing industry. Our prior advisories on federal and state agency guidance can be found here, here, and here. In the discussion below, we provide updates at both the federal and state level with regard to implementation and financing of mortgage relief.

Borrowers Not Covered by CARES Act Left Looking for Options 

To recap, homeowners may only receive the protections afforded by the CARES Act if their mortgage loans are federally owned or otherwise backed by the FHA and HUD, the Department of Agriculture, the VA, or the GSEs.¹ This umbrella still leaves homeowners with privately-held mortgage loans who are experiencing the same hardships due to COVID-19 out in the rain – unless their lender or loan servicer chooses to extend similar relief.

Many borrowers are confused when told by their loan servicers that their loans are privately-held, and thus not eligible for a full 12 months of CARES Act-mandated relief. Other borrowers may be in limbo – for instance, if they only just closed on a mortgage loan that otherwise would have been sold to the GSEs, but entered forbearance before that happened.

In an effort to bridge the gap, states are actively working to find some form of coverage for those borrowers who are not afforded protections under the CARES Act, and whose lenders or servicers have not offered similar relief on their own. Some states have passed laws mandating mortgage relief (as discussed below), while others are strongly encouraging lenders and servicers to work with borrowers who are unable to meet their obligations.

Highlights From Recent HUD and GSE Guidance on COVID-19-Related Forbearance and Post-Forbearance Loss Mitigation Options: "No Lump Sum Required"

Fannie Mae’s Lender Letter LL-2020-02 titled "The Impact of COVID-19 on Servicing" (updated on April 8, 2020) and Freddie Mac's Bulletin 2020-10 (issued on April 8, 2020) provide an overview of servicers' responsibilities related to providing borrowers a forbearance plan.

Specifically, forbearance must be provided upon a borrower’s attestation of financial hardship due to COVID-19. No additional documentation is required. Servicers also need not determine the occupancy status of the underlying property during “quality right party contact” with the affected borrower.

An initial forbearance plan may be offered for up to 180 days and may be extended for an additional 180 days at the borrower’s request. However, the servicer cannot extend the forbearance period past 12 months total.

When the servicer provides a forbearance plan to a borrower, it must make the parameters of the forbearance plan known to the borrower. In an effort to streamline this informative process, Fannie Mae released a Forbearance Script for Servicer Use with Homeowners, as did Freddie Mac. These scripts are intended to put the borrower on notice that their payments have only been delayed, not forgiven and, once the forbearance is completed, there are options available to the borrower beyond making one lump sum payment to bring the mortgage current.

Guidance from the GSEs and HUD are aligning on that point – that borrowers should understand that they have options available to them beyond a lump sum payment at the end of the forbearance period. To combat ongoing confusion in that regard, on April 27, 2020, FHFA Director Marc Calabria emphasized that for GSE borrowers “[n]o lump sum is required at the end of a borrower’s forbearance plan for Enterprise-backed mortgage,” and “encourage[d] all mortgage lenders to adopt a similar approach.”

No later than 30 days prior to the expiration of the borrower’s forbearance plan, the servicer must begin attempts to discuss a non-lump-sum workout option. Some of these workout and loss mitigation options include:

• Extension of Modification for Disaster Relief - GSEs have extended to borrowers impacted by COVID-19 the availability of the post-disaster forbearance mortgage loan modifications (“Extend” modifications and “Cap and Extend” modifications) found in Fannie Mae Lender Letter LL-2017-09R and Freddie Mac Bulletin 2017-25 that were issued in 2017 to assist borrowers located in Federal Emergency Management Administration (FEMA)-declared disaster areas. A basic “Extend” modification extends the loan term in monthly increments to match the number of delinquent payments (not to exceed twelve months).
  
• Payment Deferral - Per Fannie Mae Lender Letter LL-2020-05 and Freddie Mac Bulletin 2020-06, GSEs have enabled a workout option to defer up to two past-due principal and interest payments as a non-interest bearing balance, due and payable at the maturity of the mortgage loan, or earlier in situations such as sale of property or refinance of the mortgage loan.
  
• COVID-19 National Emergency Standalone Partial Claim - On April 1, in Mortgagee Letter 2020-06, HUD required mortgagees to evaluate borrowers who received forbearance for a “COVID-19 National Emergency Standalone Partial Claim.” Similar to the GSE “extend” modifications, this HUD partial claim is available to those owner-occupant borrowers who indicate they can resume making on-time mortgage payments once the forbearance period ends, and who were current or less than 30 days past due as of March 1, 2020. If eligible, a borrower is provided a no interest, junior loan secured by their property – the “partial claim.” No payments are due until the mortgage is paid off, matures, or is accelerated. On April 17, 2020, HUD updated its Q&As for borrowers to emphasize, along with FHFA, that “[a] ‘lump sum’ repayment for the total missed payments is not required immediately at the end of the COVID-19 Forbearance period.”

Additional GSE Action and Guidance

Though parameters for borrower assistance (at least as to federally-backed loans) have been further clarified, issues remain for lenders and servicers.

For instance, a certain subset of recently-originated mortgage loans that had not yet been purchased by the GSEs went into forbearance before or shortly after the borrower made the first monthly payment. In response to this need, and to calls for the GSEs to continue to infuse the mortgage markets with more liquidity, on April 22, 2020, Fannie Mae and Freddie Mac announced they would temporarily purchase loans from lenders where the borrower has requested forbearance or has been approved for forbearance due to COVID-19.

Fannie and Freddie will now accept loans that entered forbearance shortly after closing, so long as the loan closed on or after February 1, 2020 and on or before May 31, 2020, the loan is a mortgage purchase transaction or a no-cash-out refinance, and the loan is not more than 30-days delinquent. Presumably, once the loans are purchased by the GSEs, CARES Act forbearance of up to 12 months would then be available to those borrowers as well. Fannie Mae Lender Letter LL-2020-06 and Freddie Mac Bulletin 2020-12 further address the eligibility and delivery requirements for selling loans in forbearance due to COVID-19.

In addition to this liquidity support, the GSEs have issued guidance to lenders informing them about other relaxed requirements due to COVID-19. For example, in Fannie Mae Lender Letter LL-2020-04 and Freddie Mac Bulletin 2020-05, temporary flexibilities in appraisal requirements were announced.

Joint CFPB-FHFA Borrower Protection Program

To supplement recent guidance to the mortgage industry, on April 15, 2020, the Consumer Financial Protection Bureau (CFPB) and Federal Housing Finance Agency (FHFA) announced the Borrower Protection Program. This joint initiative is intended to allow the CFPB and FHFA to share servicing information in order to better protect borrowers. The FHFA will share information about forbearances, modifications, and loss mitigation initiatives carried out by the GSEs. The CFPB will share complaint information and analytical tools with the FHFA.

Although it will take time to see the effects of the insights offered by this information sharing (including whether it results in negative scrutiny of loan servicers, as happened in the wake of the Great Recession) upcoming agency discussions are scheduled.

Those discussions include the CFPB’s joint advisory committee² meeting on May 1, 2020, which should provide some initial information regarding the CFPB’s views of impacts to consumers related to COVID-19. DWT attorneys will be in attendance and we plan to share highlights from this meeting as they pertain to the mortgage industry – be sure to check back.

States Continue to Take Varied Actions to Expand Protections to Homeowners Not Covered under the CARES Act

As reported in our prior advisory, the New York Department of Financial Services (NYDFS) issued emergency regulations requiring financial institutions to set up a 90-day COVID-19-related forbearance process for those borrowers with non-federally backed mortgages.

On April 20, 2020, Massachusetts joined New York by passing An Act Providing for a Moratorium on Evictions and Foreclosures During the COVID-19 Emergency that requires lenders to grant forbearance to borrowers for up to 180 days if the borrower submits a request affirming that the borrower has experienced financial impact due to COVID-19. There is no requirement that these borrowers have federally backed mortgages.

While not as heavy handed as the force of law, the governors of California and New Jersey have secured the support of various banks, credit unions, mortgage lenders, and servicers to provide mortgage payment forbearances of up to 90 days for borrowers who are economically impacted by COVID-19. California has also authorized local governments to halt evictions and stall foreclosures, and has requested that banks and financial institutions do the same.

By now, all 50 states and the District of Columbia have implemented some form of relief for homeowners affected by COVID-19, whether related to forbearance, limitations on evictions, or suspension of court proceedings.

If you need information or guidance about specific state relief measures, DWT’s mortgage and home lending practice is here to help.

The facts, laws, and regulations regarding COVID-19 are developing rapidly. Since the date of publication, there may be new or additional information not referenced in this advisory. Please consult with your legal counsel for guidance.

DWT will continue to provide up-to-date insights and virtual events regarding COVID-19 concerns. Our most recent insights, as well as information about recorded and upcoming virtual events, are available at www.dwt.com/COVID-19.

FOOTNOTES

1  Nearly half of the mortgages in the U.S. are owned or backed by the GSEs.
2  Consumer Advisory Board, Community Bank Advisory Council, Credit Union Advisory Council, and Academic Research Council.