Alston & Bird Consumer Finance Blog

Mortgage Loans

Alston & Bird Financial Services Regulatory Speaker Webinar Series

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On June 15, from 1 to 2 p.m., Alston & Bird will host the inaugural event in its Financial Services Regulatory Speaker Webinar Series.  The event will feature a discussion with Dr. Mark A. Calabria, Director of the Federal Housing Finance Agency and Kathy Kraninger, Director of the Consumer Financial Protection Bureau, discussing federal regulatory responses to the COVID-19 pandemic and how they affect consumer lending and mortgage servicing. Login information will be provided to participants before the program.

To register, click here.

Questions? Contact Megan Belliveau at megan.belliveau@alston.com or 202.239.3134.

CFPB Announces Two Updates Relating to COVID-19 Pandemic

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A&B ABstract:

Last week, the Consumer Financial Protection Bureau issued two announcements of interest to servicers as they continue to respond to borrowers impacted by the COVID-19 pandemic.

Consumer Complaint Report:

On May 21, the CFPB issued a report analyzing approximately 4500 complaints relating to the COVID-19 pandemic.  Among other findings, the report indicates that approximately 22 percent of COVID-19 related complaints addressed mortgages; inability to pay appeared as the most common issue.

The report’s observations include that consumers:

  • complained about being unable to reach customer service representatives, or having access to methods other than telephone contact to discuss payment options;
  • indicated concerns about potential negative credit reporting implications of alternative payment options; and
  • indicated concerns about repayment options at the end of a forbearance period, particularly whether a lump-sum or balloon payment would be required.

No-Action Letter Template:

On May 22, the CFPB issued a No-Action Letter Template permitting mortgage servicers who are seeking to engage in loss mitigation activities with consumers.  The template, requested by Brace Software, Inc., would permit servicers to use Brace’s online platform (an online version of Fannie Mae Form 710) to implement loss mitigation efforts.  According to the CFPB’s announcement,  digitizing the loss mitigation application process may improve its operation.

The No-Action Letter is the latest example of the CFPB’s use of the No-Action Letter Policy announced in September 2019 as part of the CFPB’s effort to promote innovation and facilitate compliance.

Takeaway:

Taken together, these two announcements are indicative of the Bureau’s continued focus on the impact of COVID-19 on borrowers, and on how servicers are responding to borrower needs.

 

Attorneys General Urge FHFA and HUD to Take Additional Measures to Protect Borrowers Affected by COVID-19

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A&B Abstract:

On April 23, 2020, the attorneys general of 33 states, the District of Columbia and Puerto Rico (the “Attorneys General”) sent two letters, one to the Federal Housing Finance Agency (“FHFA”) and the other to the U.S. Department of Housing and Urban Development (“HUD” and collectively with FHFA, the “Agencies”), respectively, noting that the “national response must recognize the unique challenges presented by the unprecedented number of homeowners who are affected by COVID-19, including the fact that all of these homeowners need relief at the same time..[and that] [m]eeting this challenge will require straightforward and consistent guidance that can be quickly operationalized.”  As a result, the Attorneys General urged the Agencies to make changes to their respective guidelines addressing COVID-19-related mortgage and foreclosure relief.

Revision of Forbearance Programs

The Attorneys General acknowledged that forbearance plans are a critical first response to borrowers affected by the COVID-19 pandemic.  However, the Attorneys General expressed concern that both the mortgage servicing industry and homeowners will become overwhelmed if changes are not made.   The Attorneys General recommended or encouraged that:

  • the Agencies “issue simple, self-executing guidance that servicers can easily implement to meet demand while providing an immediate, responsive resolution to borrowers.” The Attorneys General specifically expressed concern about HUD guidelines requiring an individualized evaluation for every borrower who receives a CARES Act forbearance, as well as guidelines issued by both of the Agencies requiring an individualized evaluation for borrowers coming out of forbearance, due to “grave doubts about servicers’ abilities to effectively manage the unprecedented number of borrowers who will be emerging from forbearance plans related to COVID-19 if individualized evaluations are required for each borrower.”
  • the Agencies amend their forbearance programs so that the obligation to repay forborne payments is automatically placed at the end of the loan term in the form of additional monthly payments that will follow the current term of the loan.  The Attorneys General noted that “there can be no reasonable expectation that a borrower who has experience a loss of employment or a reduction in income will be able to repay the forborne payments in a lump sum at the end of the forbearance period.” FHFA subsequently clarified its repayment requirements for its forbearance program on April 27, 2020.
  • the Agencies issue guidance allowing these post-forbearance agreements to occur without requiring borrowers to execute any additional documents, such as a loan modification agreement or a promissory note for the forborne payments, or at least waiving or easing those requirements until the pandemic abates.
  • FHFA to clarify that a borrower may receive a forbearance based on the borrower’s verbal attestation of a hardship related to COVID-19, and to encourage servicers to proactively notify borrowers of their right to verbally request a forbearance.

Expanded Eligibility for Disaster Relief-Related Modifications and Loss Mitigation Programs

The Attorneys General urged the Agencies to expand their eligibility standards for post-forbearance loss mitigation programs to enable a greater number of borrowers to qualify.  The Attorneys General urged HUD to reconsider its decision to remove the Disaster Loan Modification option for borrowers affected by COVID-19.  Further, the Attorneys General requested that the Agencies revise their respective loan modification eligibility criteria to ensure these programs have the same reach as the forbearance program mandated by the CARES Act, as the Agencies’ current guidelines impose several delinquency-related eligibility requirements.  For example:

  • Under current Fannie Mae and Freddie Mac guidelines, borrowers affected by COVID-19 are eligible for any one of three modification programs. Currently, however, a borrower is only eligible for such programs if the borrower was current or less than 31 days delinquent as of March 13, 2020. Additional delinquency-related eligibility criteria apply for the Cap and Extend Modification and Flex Modification programs.
  • Under current HUD guidelines, a borrower is only eligible for the COVID-19 Partial Claim if the borrower was current or less than 30 days delinquent as of March 1, 2020 and the partial claim amount does not exceed 30 percent of the unpaid balance. If a borrower is ineligible for the COVID-19 Partial Claim, then the borrower will be reviewed for HUD’s FHA-HAMP program. The Attorneys General noted that the FHA-HAMP program has additional seasoning requirements, such as requiring the borrower to have made at least 4 payments and the loan to have aged at least 12 months.

The Attorneys General urged the Agencies to waive the delinquency status requirements of these modification programs and noted that post-forbearance modification programs should be commensurate with the forbearance plans required by the CARES Act, as the CARES Act requires forbearance for any borrower experiencing a COVID-19 financial hardship regardless of delinquency status.  Moreover, the CARES Act authorizes forbearances of up to 360 days, so many borrowers receiving CARES Act forbearances will be more than 360 days delinquent by the end of the forbearance period.

Eviction and Foreclosure Moratoriums

Finally, the Attorneys General urged the Agencies to “instruct servicers that they also must suspend all foreclosures and evictions currently in process and cannot move forward to complete any step in the judicial or non-judicial foreclosure or eviction process while the moratorium is in place,” to address differences in various states’ foreclosure and eviction processes.

Currently, the CARES Act states that servicers of federally backed mortgages may not initiate any judicial or non-judicial foreclosures process, move for a foreclosure judgment or order of sale, or execute a foreclosure-related eviction or foreclosure sale until at least May 17, 2020. The Attorneys General asserted that advancing any step of the eviction or foreclosure process during a forbearance related to COVID-19 will only lead to borrower confusion and harm.

Takeaway

As the COVID-19 pandemic continues to affect homeowners and the mortgage servicing industry, there will likely be continued political pressure on the Agencies to further revise servicer loss mitigation guidelines. Servicers will need to be vigilant to stay on top of the rapidly evolving market conditions and regulatory environment.

 

FHFA Clarifies Repayment Requirements for GSE Forbearance Plans

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A&B ABstract:

On April 27, the FHFA provided clarification on the repayment of mortgage loan forbearance granted in response to the COVID-19 pandemic.

FHFA Announcement

On April 27, Federal Housing Finance Agency (“FHFA”) Director Mark Calabria clarified that borrowers who have a GSE-backed mortgage will not be required to make a lump sum repayment at the end of a forbearance plan granted in response to the COVID-19 pandemic.

CARES Act

The CARES Act grants forbearance rights to borrowers with a federally backed mortgage loan.  Specifically, during the covered period, a borrower with a federally backed mortgage loan who is experiencing a financial hardship that is due, directly or indirectly, to the COVID-19 emergency may request a forbearance for up to 180 days, with the possibility of up to an additional a 180-day extension.

The CARES Act is silent on when a borrower is required to repay the forborne payments.   Technically, at the point the borrower is delinquent and according to the terms of the security instrument, those payments can be called due. However, in light of the current crisis, lawmakers have expressed concern that borrowers who have lost or reduced income will be able to repay the forborne payments in a lump sum following the forbearance period.

FHFA Clarification

According to the FHFA, the mortgage servicer will contact each impacted borrower 30 days prior to the end of the forbearance plan period to discuss repayment options.  Potential repayment options include: (1) establishment of a repayment plan; (2) modification of the loan to add the payments to the end of the mortgage; or (3) modification of the loan to reduce the borrower’s monthly mortgage payment.  If a hardship persists as of that time, the servicer may extend the forbearance plan.

Takeaway

Last week, attorneys general in 33 states, the District of Columbia, and Puerto Rico urged Director Calabria “to revise the forbearance programs so that the obligation to repay forborne payments is automatically placed at the end of the loan.”  Today’s announcement may be in response to that request.

FHFA Limits Servicer Advancing Obligations for Loans in COVID-19 Forbearance

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A&B ABstract: A new Federal Housing Finance Agency policy brings clarity for mortgage servicers’ liquidity needs and provides a cap on servicer advancing obligations during the coronavirus pandemic.

FHFA Clarification

On April 21, 2020, the Federal Housing Finance Agency (FHFA) announced that it was aligning Fannie Mae’s and Freddie Mac’s policies so that servicers of Fannie Mae and Freddie Mac single-family mortgage loans that are in forbearance as a result of COVID-19 will only have an obligation to advance four months of missed principal and interest payments. The FHFA announcement confirms that once the advances are made for four months, if the loans continue to remain in forbearance, servicers will have no further obligation to advance scheduled principal and interest payments for those loans.

While this is not a liquidity facility (as the mortgage industry was hoping for) this change in policy does provide a cap on servicer advancing obligations. Mortgage servicers are generally required to advance principal and interest payments when a borrower fails to make scheduled payments due on a mortgage loan that underlies a mortgage-backed security (MBS). Given the number of homeowners that have already and that are expected to utilize a forbearance plan as a result of COVID-19, this policy provides some clarity on the scope of the liquidity needs that mortgage servicers will face over the coming months while loans are in forbearance.

The FHFA’s announcement further confirmed that mortgage loans with COVID-19 forbearance status will remain in the MBS pool. Typically, Fannie Mae or Freddie Mac would buy out delinquent mortgage loans from the MBS pools. However, the FHFA advised that such loans should remain in MBS pools “for at least the duration of the forbearance plan.”

The FHFA policies apply to all Fannie Mae and Freddie Mac mortgage servicers (whether banks or nonbanks and regardless of the size of the servicer).