With the COVID-19 pandemic bringing the U.S. economy to a halt, residential mortgage servicers are bracing for widespread defaults as a result of the general economic shutdown. A recent projection from Moody’s estimates that approximately 30% of home loans could enter default if the economic shutdown continues through the summer. To alleviate pressure on borrowers, governmental bodies have announced new measures to ensure borrowers have breathing room and avoid default.
While many cities and states have suspended evictions and foreclosures, on March 18, 2020 the Department of Housing and Urban Development announced plans directing the Federal Housing Administration (“FHA”) to suspend foreclosures and evictions on single family homeowners with FHA-insured mortgages for the next 60 days. Further, the Federal Housing Finance Agency (“FHFA”) announced a similar policy on March 18. 2020, directing Fannie Mae and Freddie Mac to suspend mortgage and eviction proceedings for at least 60 days. Under this new policy, if a borrower’s ability to pay on a Fannie Mae or Freddie Mac owned loan is impaired, borrowers can temporarily delay monthly mortgage payments without incurring late fees, having delinquencies reported to credit bureaus.
On March 27, 2020 President Trump signed the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) into law. In addition to plans from the FHA and FHFA to suspend eviction and foreclosure proceedings, the CARES Act provides borrowers who have “Federally backed mortgage loans” access to newly created forbearance programs, regardless of whether or not they are in default. Borrowers may request forbearance by submitting a request to their mortgage servicer affirming they’re facing financial hardships in light of the COVID-19 pandemic. Servicers must then provide a forbearance of up to 180 days and may not require additional information from a borrower before granting a forbearance.
On April 3, 2020 Consumer Financial Protection Bureau (Bureau), Board of Governors of the Federal Reserve System (Federal Reserve), the Federal Deposit Insurance Corporation (FDIC), the National Credit Union Administration (NCUA), the Office of the Comptroller of the Currency (OCC), and the State Banking Regulators (collectively, “the agencies”) issued a policy statement detailing how they will conduct supervisory and enforcement practices in response to the CARES Act. The policy statement clarifies that the agencies will not take supervisory or enforcement action against mortgage servicers for delays in sending certain early intervention and loss mitigation notices and for delays in sending annual escrow statements. The complete policy statement can be found here.
In light of these governmental actions to assist borrowers, industry advocates are concerned that allowing borrowers to delay payments for an extended period of time could cause serious distress in the mortgage finance industry. Extended forbearances would frustrate payments to investors in residential mortgage-backed securities. Industry advocates argue this could eventually make it more difficult for borrowers to access credit. To offset some of these challenges, the Structured Finance Association (“SFA”) sent a letter to the U.S. Department of the Treasury and Internal Revenue Service, asking for guidance to relieve issuers and holders of mortgage-backed securities from adverse tax consequences as a result of these forbearance measures. The full SFA letter can be found here.
The U.S. financial regulatory agencies have each established webpages dedicated to the COVID-19 pandemic. In addition, Norton Rose Fulbright has established a webpage focused on the COVID-19 pandemic, offering a wide variety of information and training resources.