Few could have predicted the future six months ago when President Trump signed the CARES Act, Congress’s most comprehensive effort to provide relief to Americans suffering from both direct and indirect effects of the Covid-19 pandemic. In particular, its mortgage-relief provisions were big steps, more comprehensive and wide-ranging than any federal borrower-focused mortgage relief in history.
Many many of the key mortgage-related provisions in the CARES Act had a temporary duration, but six months later, we now expect the pandemic’s effects to be significant for at least several more months. Many of the foreclosure and eviction moratoriums are starting to expire (both in the CARES Act and under the state laws and executive orders), and this impacts the real estate lending community and the legal community.
While federal agencies and state governments have enacted rules and regulations designed to continue to provide consumers with mortgage relief, the mortgage industry has begun to fear that those measures are merely prolonging the consequences for homeowners who have been unable to make their mortgage payments.
CARES Act Provisions
Congress identified homeowners and renters as a class that needed specific Covid-19-related assistance. The CARES Act imposed a 90-day moratorium on foreclosures for all “federally backed mortgage loans,” meaning all mortgage loans insured or guaranteed by a federal agency or owned or securitized by a government-sponsored enterprise (GSE).
It also mandated that all mortgage loan servicers provide a 180-day forbearance period for federally backed mortgage loans upon a borrower’s certification that he or she is experiencing financial hardship related to the pandemic, and mandated that for all consumer loans (including mortgage loans) creditors alter how they report credit information to the credit bureaus to mitigate the negative effect of a report that the consumer received an “accommodation” due to Covid-19.
While mortgage default rates remain low, the Mortgage Bankers Association reported that as of Sept. 27, 6.81% of residential mortgage loans were in forbearance, representing some 3.4 million homeowners.
A Changing Compliance Regime
Statistics showing a rising number of mortgage borrowers who are experiencing financial distress may sound like echoes of the financial crisis of 2008, but there is one crucial difference this time around. In 2008, home values quickly declined as loan default rates rose, leading to serious secondary consequences in the secondary markets.
In 2020, however, housing prices continue to rise, aided by historically low interest rates and a lack of inventory. Yet secured lenders are barred from accessing their secured collateral by the legal regimes preventing foreclosures and evictions.
The mortgage industry has also faced a greatly increased compliance regime. As Congress and the states were enacting a slew of mortgage-related emergency rules in March and April, mortgage servicers—particularly those with nationwide mortgage loan portfolios—were struggling to stay up to date with a compliance regime that changed on a daily basis.
States such as New York, Massachusetts, Oregon, and California have all passed laws (or their governors have issued executive orders) expanding the availability of Covid-19-related mortgage relief to borrowers, including in some cases borrowers on private loans that were not covered by the CARES Act. Mortgage servicers also have had to track the various requirements imposed by the owners of those mortgage loans regarding Covid-19 relief, including the eligibility criteria for different types of loan modifications and payment deferral options.
What to Expect
Looking forward, the mortgage lending and servicing industry can anticipate several more months of the odd split of a historically high number of borrowers experiencing financial distress, while mortgage loan originations continue to rise.
The legal regime will remain in flux, as federal and state governing bodies will continue to pass new laws and regulations designed to provide homeowners with relief, or at least extend the timeline for existing measures. This will put a great deal of strain on lenders’ and servicers’ compliance staff, as they will have to be closely monitoring transactions on both the origination and servicing side.
Mortgage servicers will also have to face the challenge of managing loans that are suddenly in default once the 180-day or 360-day forbearance periods expire. While the GSEs and the Department of Housing and Urban Development have sought to provide borrowers with several options for repaying the amounts accruing during forbearance, borrowers who do not contact their servicer or who were already in significant default when they received forbearance will not qualify for most forms of relief.
Without any other options, mortgage servicers will have to begin the process of instituting foreclosures on that set of loans, all the while navigating the patchwork of federal, state, and local laws restricting foreclosures and evictions.
Many mortgage servicers anticipate that the expiration of the forbearance periods will also bring a rise in litigation. Although some borrowers have already filed lawsuits alleging that their lenders and servicers failed to comply with the CARES Act (or gave them forbearance they did not actually want), most of the disputes that would normally lead to litigation may have been temporarily suspended by the availability of forbearance—i.e., a borrower not making regular payments or facing foreclosure is not likely to bring a lawsuit.
The expiration of the forbearance period could bring a wave of lawsuits over disputes that have built up over the past six months.
In short, this is an uncertain and difficult time for the mortgage industry. While the future of the pandemic may be almost impossible to predict, some of the specific challenges to the industry can be anticipated—and smart companies are preparing for them now.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
R. Aaron Chastain is a partner in the Birmingham, Ala., office of Bradley Arant Boult Cummings LLP and a member of the firm’s Banking and Financial Services practice group. He represents a number of mortgage lenders and servicers in compliance and litigation matters.