With COVID -19 seemingly in the Nation’s rear-view mirror, what is the outlook for consumers who placed their mortgage in forbearance during the global pandemic?
What is the moratorium?
Moratorium is a fancy word for a pause or break in something occurring. This nation-wide mandated pause for many mortgage companies has given homeowners a much needed financial break during COVID-19. Let’s review the particulars:
- The Moratorium prevents mortgage servicers from initiating a judicial or non-judicial foreclosure, seeking a court order for a foreclosure judgment or order of sale, holding a foreclosure sale, or executing a foreclosure-related eviction
- The CARES Act included a temporary foreclosure moratorium for certain loans on single-family properties that lasted until May 17, 2020. Upon its expiration, the relevant federal agencies all announced that they were extending (multiple extensions) the moratorium for their respective loans through June 30, 2021.
- FHA: applies to FHA-insured, single-family loans, and home equity conversion mortgages (reverse mortgages) – the moratorium is for all new foreclosure actions and foreclosure actions currently in process.
- VA: applies to properties secured by VA-guaranteed mortgages, including those previously secured by VA-guaranteed loans but currently in VA’s real estate owned (REO) portfolio – the moratorium stops the initiation of foreclosures, the completion of foreclosures in process, and evictions.
- USDA: applicable to Single-Family Housing Direct Home Loans and Single Family Guaranteed Home Loans – halts the initiation of foreclosures, the completion of foreclosures in process, and evictions of homeowners from properties.
- FHFA: applies to Fannie Mae and Freddie Mac backed mortgages – suspended foreclosures and REO evictions.
Who is protected from foreclosure?
Borrows with “federally-backed mortgage loans” and those tenants living in a property with such a loan – This only accounts for approximately 70% of mortgages in the United States
Who/what is not protected?
If a person owns a privately held mortgage, the moratorium will not apply – 30 % of the US homeowners have privately held mortgages.
The foreclosure moratorium does not include vacant or abandoned properties.
Other Legislative Proposals
Consumer Financial Protection Bureau (CFPB)
Protections for Borrowers Affected by the COVID-19 Emergency Under the Real Estate Settlement Procedures Act (RESPA), Regulation X
- In comment submission period until 05/10/2021
- Broadens foreclosure moratorium to all homeowners to not just government-back, Fannie Mae, or Freddie Mac
- Creates an exit strategy for when the foreclosure moratorium ends
- By September, 1.7 million of these borrowers will exit forbearance
- As of January 2021, 2.1 million borrowers in forbearance programs who were more than 90 days behind on their mortgage payments
- around 242,000 homeowners who were 90 days or more delinquent who are not in forbearance programs
- The high volume of borrowers exiting forbearance within the same short period of time could strain servicer capacity
- The amendment applies only to mortgage loans secured by the borrower’s principal residence
- The goals:
- Establish a temporary COVID-19 emergency pre-foreclosure review period until December 31, 2021, for principal residences
- Borrowers and services working together to avoid foreclosures
- Prohibit servicers from making the first notice or filing required by applicable law for any judicial or non-judicial foreclosure process until after December 31, 2021
- Provide services to offer certain streamlined loan modification options
- Make sure the servicers are reasonable and diligently communicating to borrowers
- Define COVID-19-related emergency to mean a financial hardship due, directly, or indirectly, to the COVID-19 emergency
What happens after the Moratorium ends?
Theoretically, when the moratorium ends then the foreclosures can restart. The interesting fallout from all the forbearances will be “what happens” to all these payments that were placed in forbearance. We will likely see one of two scenarios playing out in the next 6 months: (1) Either record number of foreclosures occurring; or (2) record number of loan modifications occurring.
The Consumer is encouraged to stay in close contact with their mortgage company / servicer and explore the options that they have: repayment in lump sum, loan modification or placing the missed payments to the end of the existing loan. But, all these payments coming due will have far reaching implications to consumers and the Nation’s economy.
Looking through the Crystal Ball – Issues on the Horizon
The federal regulator of Fannie Mae and Freddie Mac unveiled a new plan in late April aimed at helping more households lock in historically low interest rates, targeting lower income borrowers who have missed out on the refinancing boom of the past year. The Federal Housing Finance Agency, which oversees the government-controlled Fannie Mae and Freddie Mac announced plans to ease credit requirements, simplify documentation and waive certain fees for borrowers seeking to refinance their loans. The program is expected to get off the ground by the summer. To benefit from the changes, borrowers need to make 80% or less of their area’s median income and not have missed more than one mortgage payment in the past twelve months. The program only applies to borrowers with existing loans backed by Fannie Mae and Freddie Mac.
What is President Biden doing about his campaign pledge to forgive/cancel Student Loan indebtedness? Despite his promise to cancel $10,000 of student debt, President Biden has yet to present a plan for reducing the roughly $1.7 trillion in student debt across the board. Shortly after taking office, Biden signed an Executive Order to extend the pause on student loan payments and interest until the end of September 2021. Former President Donald Trump initially suspended payments at the start of the pandemic and the loan suspension was extended two more times. In Biden’s American Rescue Plan, a provision removed any tax penalty if student loans are indeed forgiven. This would apply to both private and government loans. Note, in early May Biden picked Rich Cordray as the new head of the Education Department’s Office of Federal Student Aid. Cordray is a close ally of Elizabeth Warren – a staunch supporter of canceling student loan debt up to $50,000. Biden has questioned whether he has the power to sign an executive order erasing $50,000 in student loan debt. Biden has asked Education Secretary Miguel Cardona to advise whether he does or not. If not then this would most likely be a showdown in the evenly split Senate.
The economy is running on a stimulus-fueled caffeine high. What will happen when it wears off and things return to “normal?” What happens when the primary driver, government spending, fades away? This is an interesting and complex subject that applies not only to life in general, but also to the practice of consumer bankruptcy, as Eric Wilson Law, LLC, can explain. Some additional points to ponder:
- Will Senator Warren’s S.4991 Consumer Bankruptcy Reform Act gain traction?
- Will the 910 valuation requirement be altered because of the impacts of COVID-19 on consumers?
- Will the way we practice, both with our clients and in-court appearances, return to “normal” or has the pandemic provided us with a road map of greater time efficiency. In that same vein, have stringent signature requirements and Rule 7004(h) service [due to the inefficiency of the USPS] become relics of the past. Do they need to be?
- What, practically, will happen to all these loans when the forbearance period ends? Overwhelming defaults and foreclosures? Do sub-prime lenders face their own financial and legal problems that send us into another crisis/collapse? Are bankruptcy courts flooded with supplemental proofs of claims resulting in motions to modify? Do mortgage companies start to foreclose and thus lead to large consumer chapter 13 filings?
- Unlikely a fourth round of stimulus money
- What will happen with Unemployment Benefits Supplements? South Carolina, Alabama and Montana to end pandemic supplements
Consumer Bankruptcies hit a record low in the fourth quarter of 2020. This is after record bankruptcies were predicted by experts this time last year. According to Epiq date, Chapter 7 filings were down 22% compared to 2019. Chapter 13 filings were down 46%. What will the trend be for 2021?