Opinion

Servicers to feel brunt of foreclosure moratorium, forbearance rights

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With new relief provisions put in place by the CARES Act for homeowners and tenants facing payment defaults in coming months, mortgage servicers may feel the impact of these provisos. The act gives provides borrowers of federally backed mortgage loans a right to request mortgage payment forbearance for up to 12 months, and gives tenants of federally related properties protection from eviction.

A borrower makes a request for forbearance by (a) submitting a request to the mortgage servicer and (b) affirming that the borrower is experiencing a financial hardship during and caused by the COVID-19 emergency.

No additional documentation is required. As long as the requests are properly made, both the first and second request must be granted by the servicer — providing borrowers with a total forbearance of up to a year of payments. The language is mandatory: "Such 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."

The CARES Act moratorium applies only to federally backed residential mortgage loans which are defined as first or subordinate mortgage liens and includes condominiums and co-ops. It includes Federal Housing Administration-insured mortgages, including reverse mortgages; mortgages for American Indian and Alaska Native families and Alaska villages, tribes, or tribally designated housing entities guaranteed by HUD, as well as those originated to Native Hawaiians; Veterans Affairs-guaranteed mortgages; U.S Department of Agriculture-guaranteed mortgages; and conforming mortgages.

During the forbearance period, no fees, penalties, or interest beyond what would come due under the loan documents as if all contractual payments were made on time may accrue on the borrower's account. But the CARES Act limits the forbearance application to the "covered period" in two places, but it does not define what is the covered period in those sections.

Possible loophole

Unless this omission is deemed a drafting error and is corrected, this undefined term may offer a loophole that will limit the borrower's ability to obtain a forbearance beyond 180 days. In Section 4022(b)(1) a borrower's right to make its first request for a forbearance is limited to during the covered period. Additionally, the application for a second 180-day forbearance must also be made during the covered period under Section 4022(c)(1). But Section 4022 does not define covered period, whereas other sections of the CARES Act do, namely Section 4021(F)(II) and Section 4023(f). If the national emergency declaration for COVID-19 is terminated before the second 180-day forbearance application is due, then it may not be within the covered period.

To remedy the undefined term, the statute should either be amended to delete reference to the covered period in Section 4022, or adopt the definition of covered period supplied in Section 4023. Removing the limitation will supply more relief to consumer borrowers, but doing so will also increase the burden facing servicers of federally backed loans who will have to forgo monthly payments for a full year.

Foreclosure moratorium

Banks and mortgage services should also be aware of a foreclosure moratorium, which is in effect until May 15, except where a property is vacant or abandoned. Before May 15, a servicer may not initiate a new foreclosure, make a motion for a foreclosure judgment or an order of sale, or conduct a foreclosure sale or foreclosure-related eviction.

Multifamily forbearance

The CARES Act also provides for a forbearance for multifamily borrowers, a loan secured by a property with five or more dwelling units, with a federally backed mortgage loan.

Under Section 4023, to apply for such forbearance, a multifamily borrower must have been current on payments as of Feb. 1, 2020, have a hardship that may result directly or indirectly from the COVID-19 emergency, make the request to the servicer orally or in writing, and affirm that the hardship is during the COVID-19 emergency.

Although the CARES Act does not outline specific documentation requirements, the servicer must document the financial hardship and grant the forbearance for up to 30 days. The servicer must also extend the forbearance period for up to two additional 30 day periods if made by the multifamily borrower during the covered period and at least 15 days prior to the end of the existing forbearance period.

However, unlike the undefined terms in the section that covers owner-occupied residential mortgages, the terms of Section 4023 define the covered period as beginning on the enactment of the CARES Act and extending until the earlier of the termination by the president of the COVID-19 national emergency or Dec. 31.

Moreover, tenants at the property are protected from eviction since, during the forbearance of a federally backed multifamily mortgage, these borrowers may not evict or initiate eviction proceedings solely for nonpayment of rent or charge any late fee, penalty, or other charge for the late payment of rent.

Potential impacts on residential servicers

Mortgage servicers may feel the effects of this forbearance program. Already overwhelmed by trying to manage their own organizations in a COVID-19 market, these mortgage services may be on the hook for the missed mortgage payments. Under many servicing agreements, the servicer may still be required to remit principal and interest payments to the mortgage owner even if the borrower is not making payments.

For example, under the Fannie Mae servicing guidelines, the servicer must continue to remit payments until a mortgage is "reclassified." That usually does not happen until there are at least three months of payments past due. This is in addition to the generally escrowed payments for taxes and insurance that must also be covered by the servicer.

Normally, servicers have the capital reserves to make these payments when some of their borrowers default. However, with the wave of defaults forecasted, the financial strain on servicers will be unprecedented.

Jessie Bonaros, an associate at McCarter & English LLP, contributed to this article.

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