Mortgage Loan Modifications Post-CARES Act

Apr 20

By Regina Uhl and David Pederson, Partners, April 20, 2020

The COVID-19 pandemic is impacting our economy in many ways that no one would have anticipated just a few months ago. The country’s response to this crisis is touching virtually every segment of our economy and transforming how we, as a society, conduct business. The mortgage lending industry is no exception.

Faced with the prospect of rising unemployment caused by social distancing protocols and related “Stay-at-Home” orders, the U.S. Congress understood that this unanticipated change in financial circumstances would have a materially adverse impact on many American families and their ability to meet their monthly household obligations including their monthly mortgage payment. As part of the CARES Act, Congress sought to mitigate this particular aspect of the broader negative economic impacts by affording borrowers the ability to seek temporary forbearance of their mortgage payments.

The resulting loan forbearance activity has been a boon for affected borrowers, but has created many unanticipated questions for lenders and servicers. But while the forbearance rush came upon the industry with minimal time to prepare, mortgage lenders and servicers can plan ahead for the high volume of loan modifications that will be required at the conclusion of the forbearance period.

Below we set forth the relevant background and suggest some approaches to both prepare and ultimately execute on this impending flood of loan modifications.

The CARES Act

The Congress passed and the President signed the CARES Act into law on March 27, 2020. The CARES Act enables borrowers with residential mortgage loans backed by the federal government − FHA, VA, USDA, Fannie Mae, and Freddie Mac loans − to request from their lenders forbearance for up to one hundred eighty (180) days and provides for one additional extension of up to another one hundred eighty (180) days (provided such is requested during the “covered period”).

The meaning of the term “covered period” is, of course, critical because that term is used to define the time period during which forbearance requests can be made. It is noteworthy that Section 4022 of the CARES Act, providing for the forbearance of mortgage payments on single family homes backed by the federal government, omits (likely a result of the hurried drafting and passage of the statute) a definition of “covered period” from the language of the statute itself. Thus, lenders and loan servicers have to look elsewhere for interpretative guidance.

Specifically, one may look to Section 4023 of the CARES Act to gain insight into the definition of this term. That section applies to forbearance requests for multi-family properties. In that context, “covered period” is defined to be the time period measured from the date the CARES Act became law (March 27, 2020) to the sooner of December 31, 2020, or the termination date of the COVID-19 national emergency. While the Section 4023 definition is not set forth expressly in Section 4022 or incorporated by reference, it is part of the same broader statutory scheme and, therefore, provides guidance on how the term should be interpreted elsewhere in the same statute, also offering additional insight into Congressional intent. While the Section 4023 language represents the most likely interpretation of the term “covered period” as it is used in Section 4022, the absence of explicit statutory language in that particular provision, likely could provide an impetus for additional regulatory guidance, particularly if conflicting views emerge. For practical purposes at this moment, it is fair to say that forbearance requests currently being made during the height of the COVID-19 crisis, plainly will be treated to fall within the scope of Section 4022.

What is Required to Qualify for Forbearance?

In making the request for initial forbearance in the “covered period,” a borrower must only affirm to his/her loan lender/servicer that he/she is experiencing a pandemic-related financial hardship. To be clear, the statutory language itself does not require the borrower to produce any additional documentation to qualify for this forbearance. During any forbearance period, regular interest will continue to accrue on the loan, but no additional fees, penalties, or interest may be added to the loan.

Actions for Lenders

Lenders could choose to modify most loans immediately following a borrower forbearance request. However, lenders need to consider the likelihood that a borrower will seek the second period of forbearance contemplated under the CARES Act. So, the decision becomes whether to go through the administrative burden and costs of modification two times or whether to simply wait and see what any individual borrower ultimately requests. In this regard, it is noteworthy that Fannie Mae requires modification at the end of the forbearance period – which seemingly would mean at the conclusion of the extended forbearance period in those situations where the borrower seeks to extend the forbearance for the additional period of one hundred and eighty (180) days.

Options for Modification

Presuming lenders will choose to wait to modify the loans until the end of the full forbearance period, fast forward six months or twelve months, the forbearance will be coming to a conclusion and both lenders and borrowers will need to modify the loan to reflect the impacts of the forbearance period(s). What are the possible options for accomplishing modification?

The three most common scenarios being discussed are:

Borrower would owe the entire unpaid amount in a lump sum once the forbearance period has ended or at the end of the loan term
The loan term would be extended and any missed payments during the period would be added or tacked onto the end of the mortgage
Following the conclusion of forbearance, the borrower’s subsequent monthly payments would be adjusted and increased to make up for the total amount that was deferred

The Lump Sum Payment Solution

Knowing what we now know about the far-reaching impacts of the COVID-19 crisis, the option of a lump sum payment at the end of the forbearance period most likely will prove to be either unacceptable or simply financially impossible for most borrowers, given the negative economic impacts caused by the pandemic. That is possibly the same issue for tacking the unpaid amount onto the end of the loan term, resulting in a larger final balloon-type payment. Although since the average life span of a mortgage is five years, the latter approach might present a more feasible option.

Extending the Loan Term

Extending the loan term is a common modification option, in which case the loan term is extended to account for the period of actual forbearance, so an original 15-year mortgage loan with a 12-month forbearance period would be modified into a 16-year mortgage. This is popular with consumers as they typically restart paying the same monthly payment that they were paying prior to the forbearance period.

Increasing the Monthly Payment Amount During the Post-Forbearance Period

The third option is spreading the total amount of the deferral out over a number of future payments; whether it is ten payments or a hundred payments, depending on what lenders want to offer borrowers. Lenders and borrowers may agree to add the interest accrued during the forbearance period to the principal balance of the loan. That would increase the monthly payment amount if the maturity date of the loan remains unchanged. Alternatively, payments could remain the same or even be lower if the maturity date is extended. Capitalizing interest would likely be a better solution than requiring borrowers to pay the accrued interest at the time of modification.

Preparing for the Modification Surge

First comes the flood of forbearance requests, then six to twelve months later comes the modification surge. MBA is reporting the unprecedented increase in numbers -- “Forbearance requests grew by 1,270% between the week of March 2 and the week of March 16, and another 1,896% between the week of March 16 and the week of March 30.” Going from requests growing by over a thousand and two thousand percent, CNBC notes the slight slowdown in forbearance requests for the first week in April – “Requests for forbearance jumped 78% for the week ending April 5th compared with the previous week, according to the Mortgage Bankers Association.” The number of borrowers now in forbearance are at 2.9 million, as of April 16, 2020, according to CNBC. And based on the call volume numbers being reported by servicers, the number of borrowers in forbearance will continue to grow.

Lenders and servicers are dealing very well with the new onslaught of forbearance requests (despite initial reported long hold times). But, when it comes to the barrage of loan modifications that will be required in the coming months, lenders and servicers now have the opportunity to plan and have a process in place to handle what many can foresee to be an overwhelming need for new loan documentation.

Lenders and servicers have several areas to prepare, such as:

Determine which types of loan modification they might offer and ensure servicing systems are ready for the large volume of changes.
Prepare customer education materials such as FAQs and notifications to help borrowers plan and to smooth out the volume of customer inquiries.
Establish loan modification language for loan documents and prepare for executing those changes with borrowers.

Given this last step is likely to require a high volume of activity in a short time period, lenders and servicers may choose to use outside assistance to address what will be a large, one-time event. If so lenders and servicers should reach out now and identify partners that can assist them with the inevitable needs that such volume brings with it. Outsourced solutions that can leverage technology and people are already an integral part of how we all conduct business and those same solutions can assist in the times ahead.