New COVID-19 Mortgage Relief Program for Homeowners

By: Lance T. Denha, Esq.

The United States government recently passed The CARES Act to provide forbearance options for federally backed or owned mortgages. The newly enacted Coronavirus Aid, Relief, and Economic Security Act (CARES Act) includes a number of provisions permitting lenders to suspend, during a covered period with respect to residential loans.

Forbearance is when your mortgage servicer, that’s the company that sends your mortgage statement and manages your loan, or lender allows you to pause or reduce your payments for a limited period of time. The types of forbearance available vary by loan type. The CARES Act calls on lenders and servicing companies to allow payment delays for up to 360 days on federally backed mortgages. Yet the CARES Act isn’t specific when it comes to what happens once the forbearance period ends. As a result, individual lenders and servicers are setting different rules about how borrowers must make up the delayed payments

In light of the CARES Act, the Federal Deposit Insurance Corporation (FDIC) issued a series of FAQs for financial institutions with respect to loan modifications. The FAQs help guide lenders as well as borrowers as they address pending defaults under existing credit facilities. The FAQs encourage financial institutions to work with borrowers who may be unable to meet their payment obligations due to COVID-19 in several ways:

The Consumer Financial Protection Bureau (CFPB) provides examples of some of the options you may encounter when you reach out to your servicer for a hardship forbearance:

• Payments due immediately after forbearance. This option allows you to pause your mortgage payments on a temporary basis. However, you’ll need to pay everything back at once when the forbearance period ends.

• Payment reduction due over 12 months. With this option, your servicer reduces your monthly payment amount for a period of time. (Perhaps your $1,200 mortgage payment could be cut down to $600 each month for a year.) Once the arrangement comes to an end, you will repay those “skipped” portions of your payments within 12 months. So, in the example provided, your post-reduction payments would be $1,800 per month ($1,200 + $600 = $1,800) for the next year.

• Paused payments due at the end of the loan. Your mortgage servicer may allow you to pause payments for up to one year. Those delayed payments are added onto the end of your loan and extend your repayment time frame.

PAYMENT ACCOMMODATIONS

Short-term accommodations which modify, extend, suspend or defer repayment terms should be intended to facilitate the borrower’s ability to work through the immediate impact of the virus. According to the FAQs, all loan accommodation programs should ultimately be targeted towards repayment. To that end, the FDIC recommends that financial institutions address deferred or skipped payments by either extending the original maturity date or by making those payments due in a balloon payment at the maturity date of the loan.

SHORT-TERM MODIFICATIONS

Significantly, agency examiners will not categorically regard all COVID-19 related loan modifications as TDRs. Short-term (e.g. six months) modifications made on a good faith basis in response to COVID-19 events to borrowers who were current prior to any relief will not be considered TDRs. For modifications designed to provide temporary relief for current borrowers affected by COVID-19, financial institutions are directed to presume that borrowers who are current on payments are not experiencing financial difficulties at the time of the modification, thereby avoiding TDR status and further analysis. Of note, modifications or deferral programs mandated by the federal or state governments related to COVID-19 are outside the scope of this guidance. Even when modifications are deemed to be TDRs or are adversely classified, they will not be criticized by the agencies so long as the lenders attempted to work with the borrowers using prudent efforts to modify the loan.

FROZEN DELINQUENCIES

Furthermore, financial institutions are not expected to designate loans with deferrals granted due to COVID-19 as past due because of the deferral so long as all payments are current in accordance with the revised terms of the loan. For borrowers who were past due prior to being affected by COVID-19, it is the FDIC’s position that the delinquency status of the loan will be “frozen” for the duration of the deferral period.

REAL ESTATE COLLATERAL

The FAQs provide guidance regarding certain operational issues with respect to loans secured by real estate. For example, if an appraiser is unable access the interior of a property due to conditions related to the COVID-19 pandemic, appraisers can make an extraordinary assumption about the interior of the property upon a variety of reasonable bases, including, but not limited to: having conducted a recent prior inspection of the property, obtaining an affidavit and/or pictures from the borrower regarding the interior, and determining that the use of an extraordinary assumption will still result in a credible analysis.

Also, financial institutions do not have to obtain an updated property valuation when granting a short-term loan modification to a borrower affected by COVID-19. The FAQs refer to the 2010 Interagency Appraisal and Evaluation Guidelines, which note that “a loan modification that entails a decrease in the interest rate or a single extension of a limited or short-term nature would not be viewed as a subsequent transaction.” Financial institutions should conduct fact-specific reviews to determine whether a long-term loan modification constitutes a subsequent transaction, which would necessitate updated valuation information.

If you have questions relating to a specific loan, please contact Lance Denha at 855-862-2223.