Note: The following is a general discussion on the specified topic or issue and may not be relied on as legal advice in any specific case or matter you encounter. You should review any applicable case, or matter with counsel experienced in this area of law and should not generally rely on the discussion in this Alert.
Date: May 14, 2020
To: All Scheer Law Group Clients and Affiliates
From: Spencer Scheer
Subject: Mortgage Forbearance/Deferrals and More Forbearance: What to do with the Debt? Will It Ever be Repaid?
(GSE’s Extend Forbearance Period on Residential Loans and Clarify Repayment Options).
Many residential (and some commercial) loans are in forbearance and deferral, as Lender/Servicers struggle to provide relief in response to the COVID-19 epidemic. A growing question is how long will forbearance or deferral go on, and then what to do with the debt? (An outline of existing Federal and CA Forbearance regulations, as well as recently proposed legislation is at the end of this article, for reference). Much more is on the horizon.
The Federal Housing Finance Agency (“FHFA”) which oversees the secondary mortgage markets, just confirmed new program options, effective July 1, 2020, on loans subject to forbearance. A new option allows a servicer to grant a borrower the right to defer missed payments, with all payments due at either sale, refinance or loan maturity. In essence, the borrower can resume ongoing payments after the forbearance period and not have to immediately resolve the accrued missed payments. 
WHY DOES THIS MATTER TO YOU?
What makes this significant to all residential lenders is that:
Ø It provides federal guidance to many lender/servicers on non-federally related loans on how to handle the burgeoning delinquency on their loans. A problem is non-GSE lenders and servicers may not be able to “kick the can” down the road on a year’s delinquency.
Ø It also allows continued purchase of loans that are already “baked in delinquent” due to forbearance on loan payments that can last as long as 360 days. This helps stabilize the secondary mortgage market so that loans can be sold on the secondary market or retained by GSE servicers. The hope is that things “return to normal” and the deferred amount can be repaid by traditional appreciation in real estate values.
There is a huge hidden danger in this whole process. Not so long ago, we came out of what is referred to as the ‘Great Mortgage Meltdown” that resulted in a nationwide/worldwide crises from 2007-2009. U.S. housing prices were artificially inflated by the federal government. Mortgage backed securities were packaged and sold to a world hungry for yield on the loans. This explosion in home acquisition occurred by removing any real underwriting requirements for U.S. borrowers to qualify for loans, and allowance of minimal or no down payment loans,
After the “meltdown”, home prices retreated briefly. Instead of allowing defaults to occur and the housing market to return to real valuation levels with qualified borrowers, the federal government and Fed operated in concert to continue an artificial reflation process. The federal government. bailed out many failing lenders. State and federal legislation was passed stopping or slowing the default process (e.g. HOBR). The Fed acted in concert with this real estate reflation process by continuing to allow artificially low interest rates and by implementing quantitative easing. This avoided more defaults, qualified more and more buyers, and real estate prices escalated again as the easy money /no down payment environment returned.
Unlike your parents or grandparents’ generation that would generally save money, put a substantial down payment on a home and live in it for many years, developing equity, most new buyers buy and assume the home will appreciate and they will move on. This works well as long as everyone “winks and nods” at the process. However, it is now very difficult for the average young person or family to afford to buy a home in CA. Add onto this fact that many current homeowners have little “skin in the game”, other than the hope of appreciation and you come back to forbearance issues. What is going to keep borrowers with little or no equity in their home if home prices deflate, instead of inflating?
Loading on debt to mortgages via deferral of missed payments, when there is a real prospect that many borrowers may remain unemployed is another version of stimulus i.e. ‘free money”. The only way the debt will ever get repaid is if housing prices continue to go up. It could happen, but there are nagging suspicions that we faced this problem after 2009 and that rather than address it with sound underwriting practices that might have made for a sustainable mortgage market, we just continued to “blow up the bubble”.
C-19 is likely a once in a lifetime event, but is the one type of event that breaks all the rules. No one is to blame, and the hope is that everyone will be saved. This is unlikely. However, we may have “gone to the well” once too often and the result this time may be structural shocks to the system that will have consequences well beyond a normal economic shock effecting liquidity. If the bubble breaks this time, there is not much the Fed can do. Eventually, the stimulus checks must stop. The alternatives if everyone “is to be saved” are far beyond economic.
Much like landlords and tenants during the great depression worked out ways to keep solvent hard working people in their homes (without federal intervention) by sharing risks for their mutual benefit, lenders and borrowers will likely be faced with the same time of problems going forward. If not, stimulus and hidden stimulus (such as yearlong forbearance) will just hide the problem for a while. There is no such thing as free money.
Please call or email if you have questions about this case.
BRIEF RECAP OF FEDERAL AND CA STATE FOREARANCE OPTIONS
A. UPDATED GSE/FOREBEARANCE (See discussion in article above).
B. CARES ACT; Coronavirus Aid, Relief, and Economic Security Act, Pub. L. No. 116-136, § 4022(c)(2), 134 Stat.
281, 491 (2020), applicable to “federally backed mortgages” and, includes the following provisions:
Ø SEC. 4022. FORECLOSURE MORATORIUM AND CONSUMER RIGHT TO REQUEST FORBEARANCE-FEDERALLY BACKED RESIDENTIAL LOANS
o Re: Forbearance:
o Duration of Forbearance: Up to 180 days and extended for up to 180 days at request of borrower.
o During forbearance period no fees, penalties or interest beyond amounts scheduled, as if the borrower made all contract payments on time.
o Servicers required to grant forbearance with no documentation other than the borrower’s attestation to a COVID-19 (“C-19) hardship.
§ Note: Only C-19 hardship needs to be shown, not that borrower was otherwise current.
o Re: Foreclosure Moratorium: 60 days from March 18, 2020.
SEC. 4023. FORECLOSURE MORATORIUM AND CONSUMER RIGHT TO REQUEST FORBEARANCE-FEDERALLY BACKED MULTIFAMILY LOANS.
o Borrower must have been current on payments as of February 1, 2020.
o Upon written or oral request for forbearance related to C-19, up to 30 days forbearance.
o Extension for up to two additional thirty-day periods, subject to discontinuance by servicer at any time.
Termination Date: SEC. 4023 (f).
COVERED PERIOD.—The term “covered period” means the period beginning on the date of enactment of this Act and ending on the sooner of—
(A) the termination date of the national emergency concerning the novel coronavirus disease (COVID–19) outbreak declared by the President on March 13, 2020 under the National Emergencies Act (50 U.S.C. 1601 et seq.); or (B) December 31, 2020.
C. CALIFORNIA RESIDENTIAL FORBEARANCE AND RELATED PROVISIONS
Voluntary and only applicable to participating lenders: See: https://dbo.ca.gov/2020/03/25/covid19/
Ø Forbearance on residential loan payments for up to 90 days.
Ø Foreclosure moratorium: 60 days from March 25, 2020.
Ø Residential Eviction moratorium from March 27 2020-May 31, 2020. https://www.gov.ca.gov/2020/03/27/governor-newsom-takes-executive-action-to-establish-a-statewide-moratorium-on-evictions/
Ø Further guidance to Financial institutions at: https://www.bcsh.ca.gov/coronavirus19/dbo_banks.pdf
D. PENDING CA LEGISLATION
Ø Pending CA legislation (AB 2501, introduced on May 11, 2020, The bill proposes a moratorium on repossession and foreclosures during the CA stated COVID-19 emergency period and an additional 180 days (6 months) after the “the emergency related to the COVID-19 disease has ended.” In addition, significant restriction on debt collection practices, including requiring registration of attorneys or trustees as debt collectors could occur.
E. PENDING FEDERAL LEGISLATION
Ø Pending Federal Legislation (Health and Economic Recovery Omnibus Emergency Solutions (HEROES) Act, introduced on May 12, 2020. Would require broad foreclosure forbearance provisions, similar to CA AB 2501, for the duration of the C-19 emergency and beyond ( See https://www.nafcu.org/newsroom/pelosi-unveils-heroes-act-more-coronavirus-relief?utm_source=NAFCU+Today&utm_medium=Email&utm_campaign=daily+news&_zs=llHef1&_zl=DM9m6