COVID, Year Two: A Look at Mortgage Relief, Regulatory Scrutiny, and the Road Ahead
March 13, 2021, marked the one-year anniversary of President Trump's declaring COVID-19 a national emergency. Through the CARES Act, agency action and guidance, and various state laws and executive orders, governments across jurisdictions acted quickly to provide mortgage relief to homeowners at risk of default.
Even with all that regulatory and legislative might brought to bear, the inability of homeowners to pay their mortgages remains widespread—and a focus of lawmakers. The Mortgage Bankers Association (MBA) reported that 5.14 percent of mortgage loans, representing 2.6 million homeowners, were in forbearance as of March 7, 2021.1
This post provides an overview, one year in, of the current state of regulators' and lawmakers' efforts to provide relief to mortgage borrowers, regulators' views of how mortgage servicers have implemented those efforts, and how that may shape the next year as we emerge from the grip of the pandemic. DWT's prior coverage of COVID-related mortgage relief and associated regulatory action and guidance is collected here.
Mortgage Forbearance Extended for Federally Backed Loans
The CARES Act directed mortgage servicers to offer 12 months of forbearance to borrowers of federally backed mortgage loans affected by COVID-19 and imposed temporary moratoria on evictions and foreclosures. The protections applied to loans backed by the Federal Housing Administration (FHA), the Department of Veterans Affairs (VA), and the Department of Agriculture (USDA), as well as loans owned by Fannie Mae and Freddie Mac.
On February 16, 2021, President Biden extended foreclosure moratoria to June 30, 2021, for FHA, VA, and USDA loans and provided an additional six months of forbearance (in three month increments) for borrowers who entered forbearance on or before June 30, 2020. President Biden also extended the forbearance enrollment deadline, permitting borrowers not currently in forbearance to request forbearance through June 30, 2021. HUD issued Mortgagee Letter 2021-05 to implement the extended forbearance relief and associated loss mitigation options.
Shortly after the Biden Administration's announcement, on February 25, 2021, the Federal Housing Finance Agency (FHFA) extended forbearance for qualifying Fannie Mae and Freddie Mac loans to up to 18 months and extended eviction moratoria for single-family foreclosures and REO evictions to June 30, 2021, bringing its prior extension (to 15 months) in line with the extensions for federally backed loans.
Homeowners with Fannie/Freddie loans must have been signed up for forbearance by February 28, 2021, in order to qualify for the extended forbearance. See Fannie Mae issued Lender Letters LL-2021-07 and LL-2021-02, and Freddie Mac issued Bulletin 2021-8, containing updated servicing and loss mitigation guidance.
The American Rescue Plan and the Homeowner Assistance Fund
In the same release announcing the extensions of federal mortgage forbearance, the Biden Administration remarked that "it is critical that Congress pass the American Rescue Plan to deliver more aid to struggling homeowners." The American Rescue Plan Act of 2021, a $1.9 trillion stimulus bill just signed into law by President Biden on March 11, 2021, establishes a $9.961 billion Homeowner Assistance Fund through which funds will be allocated by the Treasury Department among the states, Washington, D.C., and Puerto Rico by the Treasury Department.
The funds will be disbursed to states based on relative need, determined by the average number of unemployed individuals, and the total number of mortgagors in foreclosure or with 30 days' past due payments. The broad purpose of the assistance is:
[T]o mitigate financial hardships associated with the coronavirus pandemic by providing such funds . . . to eligible entities for the purpose of preventing homeowner mortgage delinquencies, defaults, foreclosures, loss of utilities or home energy services, and displacements of homeowners experiencing financial hardship after January 21, 2020, through qualified expenses related to mortgages and housing.
States are to use the funds to assist eligible households with mortgage-related expenses such as mortgage payments, insurance, utilities, and homeowner's association fees—including for items such as "facilitating interest rate reductions"—though the law lacks detail on how states will allocate the funding. The bill requires a minimum of 60 percent of allocated funds be used to assist homeowners at or below the greater of (1) the area median income, or (2) the United States median income, as determined by HUD. The remaining 40 percent is to be prioritized "to socially and economically disadvantaged individuals," which is not defined.
The relief to be provided through the Homeowner Assistance Fund is notably different from the mortgage assistance provided pursuant to the Home Affordable Modification Program (HAMP) created through the Troubled Asset Relief Program (TARP) as part of the Emergency Economic Stabilization Act of 2008 in response to the 2008 financial crisis. TARP, by contrast, primarily provided mortgage relief funds to mortgage servicers to incentivize HAMP loan modifications to borrowers and relied heavily on mortgage servicer participation and implementation.
It remains to be seen whether states receiving funding will attempt to implement similar programs. Regardless, the hard lessons mortgage servicers learned from implementing HAMP will come in handy as servicers prepare to handle the inevitable deluge of post-CARES Act forbearance loss mitigation (discussed further below).
State Forbearance Efforts
Throughout the spring and summer of 2020, various states passed sweeping bills and governors instituted emergency orders intended to supplement federal mortgage relief provided by the CARES Act by extending various degrees of forbearance, eviction, and foreclosure moratoria to eligible homeowners.2
In the fall, California added borrower protections with Assembly Bill 3088, which obligates servicers to provide a reason for denial to borrowers who are denied a mortgage forbearance, and imposes additional related procedural requirements.3 It remains to be seen if these efforts, several of which expired in December or will expire in the first quarter of 2021, will be extended, whether states will pass new bills to match the federal extensions of mortgage relief, and what, if any, additional actions states may undertake as forbearance periods end and payments become due.
We continue to monitor these state developments and, as discussed more below, we anticipate COVID-19-related compliance to take center stage in the states' post-pandemic regulatory examination and enforcement priorities.
Regulators Prioritize COVID-19 Relief Compliance
We expect the Consumer Financial Protection Bureau (CFPB) to take aim at mortgage servicers' responses to COVID-19. In May 2020, the CFPB rescheduled half of its planned examination work and conducted prioritized assessments focused on the pandemic.4
Supervisory Highlights published January 19, 2021, as part of this prioritized review of pandemic issues, highlighted various instances of noncompliance with the CARES Act by mortgage servicers, raising, in the CFPB's assessment, the risk of consumer harm.5 The conduct highlighted in the report includes descriptions of servicers contravening the CARES Act or harming consumers in various ways, such as:
- Providing inaccurate information to consumers regarding the CARES Act;
- Miscommunicating that borrowers would be required to pay one "lump sum" payment at the end of the forbearance period;
- Suggesting that consumers would be required to pay a fee to receive a forbearance;
- Sending collections and default notices, assessing late fees, and initiating foreclosures for borrowers enrolled in forbearance;
- Failing to process forbearance requests in a timely manner; and
- Enrolling borrowers in unwanted forbearances.6
Entities that were subject to a prioritized assessment can expect the CFPB to follow up on any findings.
Likewise, mortgage servicers should continue to vigilantly monitor compliance related to actions taken during the COVID-19 emergency. After his January appointment as Acting Director of the CFPB, Dave Uejio emailed the agency, stating that one of his priorities as acting director is relief for consumers facing hardship due to COVID-19 as well as a focus on the mortgage servicers' failure to properly administer relief detailed in the Supervisory Highlights.7
He stated that "the CFPB will take aggressive action to ensure that regulated companies follow the law and meet their obligations to assist consumers during the COVID-19 pandemic," that penalties may be necessary, and that he had directed the Supervision, Enforcement & Fair Lending division of the CFPB to expedite enforcement investigations relating to COVID-19.8
It is also worth considering that, though the CFPB promised to account for "good faith" compliance in certain circumstances (as we discuss here), this promise may not extend to compliance issues that persist one year into the COVID-19 pandemic. Mortgage servicers who had trouble ramping up their systems and operations to respond to the sudden demand last spring will likely be expected to have resolved those issues.
State regulators have also indicated that enforcing compliance with COVID-19-related laws is a priority. In February 2021, and again just last week, Commissioner Manuel Alvarez of the California Department of Financial Protection and Innovation (DFPI) reminded California loan servicing licensees that examinations by the DFPI now also include analysis of compliance with recently enacted laws, both state and federal, intended to protect homeowners from COVID-19-related foreclosures.
The End of Forbearance
Over 5.2 percent of residential mortgages are still in forbearance,9 and the delinquency rate in the United States was still almost 6.75 percent at the end of the fourth quarter of 2020.10 HUD, Fannie Mae, and Freddie Mac have expanded forbearance plans to a maximum term of 18 months and are consistently updating their programs to accommodate borrower needs.11
The options available for borrowers to repay forborne amounts at the end of their CARES Act mandated forbearance term vary based on the agency, but most begin with deferral programs which will allow borrowers to defer payment of forborne amounts until the end of their mortgage loan terms—generally the simplest option for borrowers capable of resuming their pre-forbearance monthly payments.12
It remains to be seen what else lawmakers and federal and state regulators will do to ease the impact on homeowners brought on by the end of forbearance, including how the $10 billion Homeowner Assistance Fund will be implemented by the states. While the combination of CARES Act mandated (or inspired) forbearance, corresponding agency loss mitigation programs, and a new influx of federal relief may yet avert a repeat of the last foreclosure crisis, it is too soon to tell.
What's clear, though, in light of statements by federal and state regulators that compliance with pandemic-related laws are a new enforcement priority, is that mortgage servicers will continue to be subject to a high degree of scrutiny with respect to the solutions they make available to borrowers, how they implement those solutions, and how they communicate with borrowers about their options.
DWT's prior coverage of COVID-related mortgage relief:
- Federal and State Agencies to Mortgage Servicers: Slow Down, Be Flexible, and Be Compassionate With Borrowers Affected by COVID-19
- Governor Cuomo Orders COVID-19 Credit Relief
- Mortgage Servicers Must Provide Substantial Forbearance Relief to COVID-19 Affected Borrowers of Federally Backed Loans
- Balancing Credit Reporting and Compassion In Light of COVID-19
- Agencies Promise Flexibility, but the Rules Still Apply: Key Takeaways from Joint Agency and CFPB Guidance Regarding Mortgage Servicing Rules and COVID-19-Related Relief
- One Month In – Updates on Mortgage Relief Efforts and Guidance
- Nearing Three Months In – More Updates on Mortgage Relief Efforts, Regulatory Guidance, and Emerging Areas of Concern
- CFPB Amends Regulation X to Account for COVID-19-Related Mortgage Relief
FOOTNOTES
1 Share of Mortgage Loans in Forbearance Decreases to 5.14 Percent | Mortgage Bankers Association (mba.org).
2 See, e.g., California, Maryland, Massachusetts, New Jersey, New York (S8243C, S8428), Oregon, and Washington D.C.
3 See, e.g., California and New York.
4 See Supervisory Highlights, Issue 23, January 19, 2021.
5 See id.
6 See id. at 6–8.
7 The Bureau is taking much-needed action to protect consumers, particularly the most economically vulnerable | Consumer Financial Protection Bureau (consumerfinance.gov).
8 Id.
9 Share of Mortgage Loans in Forbearance Decreases to 5.14 Percent | Mortgage Bankers Association (mba.org).
10 See Mortgage Delinquencies Decrease in the Fourth Quarter of 2020, MBA February 11, 2021. Delinquency rates are higher for FHA loans than for VA and conventional loans.
11 See Mortgagee Letter 2021-05; Lender Letter 2021-02 and Lender Letter 2021-07; Bulletin 2021-8.
12 See Fannie Mae's Workout Hierarchy; Freddie Mac loss mitigation evaluation hierarchy; FHA Mortgagee Letter 2021-05.
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.