Hurricanes Harvey and Irma recently caused widespread devastation and flooding throughout the southeastern United States, temporarily displacing millions of people and causing hundreds of billions of dollars in property damage. As the waters recede along the gulf coast and the full extent of the damage continues to be exposed, Fannie Mae and Freddie Mac have expressed their solidarity with those affected by implementing relief programs for their borrowers.

Fannie Mae and Freddie Mac Hurricane Disaster Relief Programs

In the aftermath of the hurricanes, Fannie Mae and Freddie Mac enacted programs to grant temporary loan forbearances to borrowers affected by the storms. Any Fannie Mae or Freddie Mac borrower with a loan secured by real property located within the Federal Emergency Management Agency’s “Designated Counties” for these hurricane disasters (a list of these counties can be found at http://www.fema.gov/disasters) may be eligible for temporary relief, however, relief is generally contingent on a loan being otherwise in good standing (i.e., not already in special servicing). ¹  If forbearance is granted, monthly installments of interest, principal and impounds will be postponed and the lender will not exercise rights and remedies in connection with any missed payments due to the hurricanes during the forbearance period.

Overview of Fannie Mae Program

• Program covers loans within the Hurricanes Harvey and Irma disaster areas.
• Maximum pre-approved forbearance period is three (3) months.
• Loans must be brought current within 12 months of the end of the forbearance period or upon borrower/servicer receipt of insurance proceeds, whichever occurs first.
• Streamlined forbearance agreement form was introduced (although servicers may use the existing form of forbearance agreement contained in the Guide).
• Fannie Mae has negotiated a flat fee of $750 with Bryan Cave for the preparation of the forbearance agreement, and if necessary, a pre-negotiation letter (which is only required if the borrower wishes to negotiate a work out beyond the scope of the forbearance agreement).
• To allow adequate time to determine the status of a property, Fannie Mae has extended the time servicers have to complete a casualty loss assessment after learning of a casualty from 45 days to 90.
• Fannie Mae is waiving late charges it is entitled to and is encouraging servicers to waive late charges to which they are entitled.
• Fannie Mae’s requirement that multifamily residential leases be for a term of not less than six (6) months has been suspended until further notice in order to allow borrowers within 500 miles of an applicable Designated County to enter into short term leases for tenants displaced by the hurricanes.²
• Borrower is required to cooperate and provide information requested by the servicer to determine the extent of damage to the property and such other action or relief that may be necessary.

Overview of Freddie Mac Program

• Program currently covers loans impacted by Hurricane Harvey; however, we anticipate that it may be expanded to also include loans impacted by Hurricane Irma.
• Maximum pre-approved forbearance period is 90 days (or three (3) consecutive monthly payment dates).
• If forbearance is granted, late charges and default interest are waived.
• Loans must be brought current through the payment of the postponed payments in 12 equal monthly installments; no interest or prepayment premiums will be assessed on postponed payments during this 12 month period.
• Servicers to use existing form of forbearance agreement contained in the Guide.
• Freddie Mac will reimburse servicers up to $750 for the completion of each forbearance agreement.
• Borrower is required to (i) provide biweekly updates to the servicer regarding the physical condition, financial condition, and occupancy of the property; (ii) provide the servicer with access to the property upon reasonable notice and consistent with any applicable governmental restrictions on access; and (iii) submit insurance claims and contact the local taxing authority to determine whether any real estate tax relief is available.

Preparing for the Casualty Crisis

One of the primary goals of the above described forbearance relief is to allow adequate time for hundreds upon hundreds³ of commercial borrowers to determine the extent to which the hurricanes affected their property and operations. For properties that suffered storm damage, servicers may find themselves tangled in a complex web of insurance coverage issues, including disputes among insurers as to who is required to pay for what. For this reason, servicers should consider taking inventory of the existing insurance on a property as soon as a casualty is suspected in order to double check, for example, that flood insurance was indeed required at origination and exists on the property. Once the servicer understands what the potential payment sources are, it will then need to recognize what each policy covers and does not cover (for example, flood insurance should not be assumed to cover all storm damage or losses resulting therefrom), as well as its rights and responsibilities under the loan documents respect to the making and settling of claims, the escrow of funds, disbursements for restoration, and application of insurance proceeds to the loan. 

Conclusion

The quick reactions by Freddie Mac and Fannie Mae to address these catastrophic events will provide short term relief for the affected borrowers and time to assess the extent of the damage and resources available to restore the properties. Unfortunately, the recovery for many borrowers will extend beyond the forbearance period and involve many complex issues.

1. It is important for servicers to be mindful that neither agency appears to have waived the servicing standard or applicable guide requirements (except to the extent expressly noted in official communications from the agencies, such as Fannie Mae’s consent within Letter 17-10 to short term leases and the expansion of time to complete casualty loss assessments) in connection with the implementation of their hurricane relief programs. Servicers should continue to consider the servicing standard and guide requirements when evaluating borrower requests for hurricane relief and consult counsel if there appears to be tension between the goals of the disaster relief program and the servicer’s obligations with respect to the management of a loan.

2. Notwithstanding Fannie Mae’s consent to short term leases, before approving a request for a short term lease a servicer should evaluate whether such short term lease would violate any applicable laws, such as anti-gouging laws, or regulations. Additionally, tax consequences should be considered for properties eligible for tax credits or that have been financed through municipal bonds.

3. Given the magnitude of the natural disasters, the number of affected borrowers continues to be evaluated, and could change based on expansion of the FEMA disaster areas, however, consider that Freddie Mac alone has thus far identified 420 commercial mortgage loans potentially impacted by Hurricane Harvey (http://www.freddiemac.com/multifamily/pdf/k_deal_potential_exposure.pdf, last retrieved 9/13/17).

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