Even if you were already delinquent on your mortgage when the COVID-19 pandemic hit – even if you were already in foreclosure – you may be entitled to strong protections under federal law.
The Coronavirus Aid, Relief, and Economic Security also known as the CARES Act is a law meant to address the economic fallout of the COVID-19 pandemic in the United States. This legislation – the largest ever economic stimulus package in U.S. history – contains several provisions that provide strong protections for certain mortgage borrowers facing financial hardship due to the pandemic.
First, Section 4022 of the CARES Act applies to borrowers whose loans are federally backed. This means the loan is owned by a government sponsored entity (GSE) such as Fannie Mae or Freddie Mac, or insured or guaranteed by the FHA, VA or USDA. Approximately 60% of loans in America are federally backed – often a borrower’s loan is owned by Fannie or Freddie and the borrower doesn’t even know it. (You can check to see if your loan is owned by Fannie Mae here, and Freddie Mac here.)
Section 4022 provides that borrowers with a one to four family home loan experiencing financial hardship due directly or indirectly to COVID-19 are entitled to 180 days of payment forbearance upon request. They are entitled to an additional 180 days of forbearance if their hardship persists beyond the initial 180 days. During the forbearance period, the loan servicer is not permitted to charge additional fees, penalties or interest (other than the normal interest that would apply to the loan if it were not in forbearance). Further, Section 4022 in combination with another federal regulation, Regulation X, mandate that once a borrower is placed in forbearance, foreclosure activity on their loan must stop. This means that, even if you were already delinquent or in foreclosure prior to the pandemic, if the pandemic has caused you a hardship and you qualify for forbearance, you can use these laws to stop your foreclosure from moving forward during the period your loan is in forbearance. This is a powerful protection!
Another important protection of the CARES Act concerns credit reporting. If your loan is current when it is placed in the CARES Act Forbearance, your servicer must continue to report it as current and paid during the entire forbearance period – even though you are not paying during the forbearance, you are entitled to have your loan reported to the credit bureaus as current and paid.
Borrowers of multi-family home loans (landlords) owned or insured by GSEs are protected in Section 4023 of the CARES Act. Under this section, covered landlords can request up to 90 days of payment forbearance. During the forbearance period, covered landlords are forbidden from evicting their tenants, or charging them late fees or penalties.
As with all good things in life, there are some caveats. First, GSE borrowers will not automatically be enrolled in CARES Act forbearance – they must request it from their servicer. In theory, all it takes is a phone call to request forbearance. But like all businesses during these uncertain times, the servicers are short staffed and their time is in high demand, so hold times have skyrocketed. It may take several hours of sitting on hold before you get through to your servicer. Obviously, given the importance of keeping your home loan in good standing, it’s worth the wait. But even if you get through – and certainly if you don’t – it’s a good idea to send your servicer a letter requesting the 180 days of forbearance you are entitled to under the CARES Act if you have a COVID-19 related hardship. Once the servicer enrolls you in the forbearance, Regulation X requires they send you a written confirmation of your enrollment within five days.
Another important thing to bear in mind and plan for is what will happen after the forbearance ends. For borrowers who were current before they went into forbearance there is some certainty here: Fannie, Freddie and FHA have announced in guidelines that, beginning on and after July 1, 2020, when a borrower’s financial hardship and forbearance end, they will automatically be enrolled in one of several post-forbearance options. The first option is a deferral program (FHA calls it a “partial claim”). A deferral or partial claim enables you to avoid having to pay your suspended mortgage payments all at once typically by adding a non-interest bearing loan at the end of your mortgage, but repayable if you sell your home.
Depending on a borrower’s financial situation there may be other available options, which include:
- A reinstatement, which means paying what you owe on missed payments in one lump sum if you can afford it. For most borrowers who’ve gone into forbearance due to a financial hardship, this is not a viable option and it should be avoided.
- A repayment plan, which means spreading what you owe on missed payments over a short period of time.
- A loan modification, which modifies the terms of your loan permanently in order to change your payment amount. It essentially means spreading what you owe on missed payments over a long period of time. For most borrowers, this would be the best option to deal with the forbearance because it will not increase their monthly payment amount from what it was before the forbearance period began.
For borrowers who were already delinquent or in foreclosure before they entered forbearance, the post-forbearance landscape is a little more uncertain because servicers will not automatically enroll them in one of the above options. But relief may still be available. Fannie and Freddie have announced that borrowers whose delinquency predated the pandemic will be eligible to apply for a “Flex Modification” when their hardship and forbearance end. The loan modification application process can be tedious and frustrating, though. Borrowers should be prepared to fill out all required application materials and provide the necessary supporting documents to their servicer as soon as they are requested. Once the application process begins these tasks must be completed in a timely manner to avoid their application materials becoming “stale dated,” which risks having to start the process over again or being denied because their application is considered incomplete.
The final thing to be mindful of is that a borrower’s right to enroll themselves in forbearance will not last forever. The CARES Act provides that borrowers must take advantage of it “within the covered period,” which is defined as prior to December 31, 2020, or the date on which the President declares an end to the COVID-19 national emergency, whichever is earlier. Borrowers who wish to take advantage of their right to payment forbearance are advised to contact their servicer and seek forbearance as soon as possible, or they risk missing the deadline to do so.
There is additional legislation pending in Congress to address more of the economic fallout caused by the pandemic, but whether any additional relief will pass that helps mortgage borrowers as much as the CARES Act already does is highly uncertain.