In response to the coronavirus pandemic, the federal government passed the CARES Act, which provides a number of protections to homeowners unable to pay their mortgages. The CARES Act prohibits any home foreclosures before December 31, 2020, and allows homeowners to seek forbearance from lenders for a period of 180 days, with one extension of 180 days. The Act applies to all federally backed mortgages. Thus, a homeowner with a federally backed mortgage can seek forbearance for up to one year. Since President Trump signed the CARES Act into law on March 27, 2020, most forbearances will not terminate until April or May 2021. To date, the federal government has not sought to extend CARES Act benefits beyond their expiration date.
A recent report from Construction Coverage reviewed mortgage delinquency rates in all 50 states and contrasted figures that the Federal Reserve Bank of New York published against those that CoreLogic, a real estate data clearinghouse, reported. The Federal Reserve reported a 15-year low in the rate of mortgage delinquencies. However, forbearance under the CARES Act had a direct effect on the delinquency rates reported. CoreLogic, on the other hand, found alarmingly high rates when forbearance was not a factor. For example, Pennsylvania, which had the 15th highest rate of delinquency in the nation reported at 1.13 percent. The CoreLogic report also noted that the April 2020 unemployment rate in Pennsylvania was 15.6 percent. That rate has since dropped to approximately 8.1 percent. The mortgage delinquency rate in West Virginia was reported at 1.24 percent with an April 2020 unemployment rate of 15.8 percent. The current unemployment rate there is 7.9 percent.
On June 23, 2020, the Consumer Financial Protection Bureau issued a new interim final rule allowing lending servicers flexibility to offer COVID-19 relief options. Once the CARES Act forbearance programs end, homeowners with forbearance may have a couple of options. They may have to repay the amounts in forbearance under the original terms of the mortgage loan. Or, the lender may allow homeowners to enter into repayment plans to repay an additional amount monthly until all forbearance balances are repaid. Some financial institutions may offer homeowners the ability to defer forbearance amounts until the loan’s maturity, or until the property is sold or refinanced. In this regard, the FHA, Fannie Mae and Freddie Mac allow the forborne amounts to be packaged into an interest-free subordinate mortgage to be paid once the initial mortgage is repaid. Finally, lenders may seek to modify the terms of loans to account for the amounts in forbearance. All of these options are subject to eligibility criteria established by federally backed mortgage programs, the CFPB and federal lending regulations, such as Regulation X. Some states have enacted additional regulations on the handling of forbearance amounts once the CARES Act program ends. Utilization of these options will require lenders to complete loss mitigation applications.
Despite higher than normal mortgage delinquency rates, it is unclear whether the conclusion of forbearance programs under the CARES Act will trigger a deluge of foreclosure actions. First, if unemployment rates continue to trend downwards, we can expect a smaller need for mortgage foreclosures. Additionally, if borrowers enter into programs that allow them to defer payment on forborne amounts or to refinance, borrowers should be able to restart mortgage payments without significant increased financial burden. Many variables will come into play with regard to foreclosure trends. These variables include additional governmental relief in the form of additional forbearance and prohibitions against foreclosure. Even if the federal government passes no further legislation, states, and to some extent courts, can enact their own rules and regulations against foreclosures. Such relief also may be contingent upon the future course of the pandemic itself, which as of the date of this article, continues to rise significantly.
The world of post-forbearance lending is likely to see an increase in delinquencies that will need to be addressed with measures to refinance either existing loans or the amounts in forbearance. Although these delinquencies may increase foreclosure actions, the number of actions may be mitigated as the rates of unemployment go down. Handling forbearance will require navigation of many different lending policies, regulations and court actions. Lender flexibility is likely to be key to navigating these waters successfully.