During the Covid 19 Pandemic, many homeowners experienced a reduction in income from either job loss, reduced pay, loss of overtime, loss of rental income, or some combination thereof. As a result, they may have fallen behind on their monthly mortgage payments. According to the National Housing Law Project, of all outstanding single-family mortgages, approximately 70% are owned or backed by a federal agency, and approximately 30% (roughly 14.5 million loans) are privately owned and not backed by any federal agency. The mortgage relief available to homeowners may vary depending on who owns their loan, with government-backed loans generally receiving more protection. Many homeowners were able to get relief from from the economic hardships caused by COVID-19 by entering into forbearance agreements with their mortgage lenders or servicers. These forbearance agreements suspended mortgage payments for a fixed period of time. It also should be noted that while the normally required monthly mortgage payments may have been suspended, the monies owed were not forgiven. For many homeowners, these forbearances will end between September and November of this year. Furthermore, the federal foreclosure moratorium is scheduled to end on July 31, 2021. In light of this, homeowners with expiring forbearance agreements should consult with their lender or servicer immediately to find out their loss mitigation options to avoid foreclosure. If your servicer is not properly communicating with you or if you need help understanding your options, please call the Law Offices of David I. Pankin at (888) 529-9600.
Consumer Financial Protection Bureau Issues New Post-Forbearance Loss Mitigation Rules
The Consumer Financial Protection Bureau (CFPB) recently released a new post-forbearance modification rule for loans coming out of forbearance. The 2021 Mortgage Servicing COVID-19 Rule is set to take effect on August 31, 2021 and sets forth guidelines for borrowers who are more than 120 days behind on their mortgage payments. The purpose of the rule is to ensure homeowners have an opportunity to avoid foreclosure. For those who are behind on their mortgage, the CFPB stipulates that loan servicers need to give homeowners at least three options to avoid losing their home:
- resume regular payments and move any missed or suspended payments to the end of the mortgage,
- modify the term length of the loan or interest rate, or
- sell the home.
The 2021 Mortgage Servicing COVID-19 Rule permits servicers to offer certain COVID-19-related streamlined loan modification options. Usually, servicers are required to base their evaluation of loss mitigation options on a completed application. In order to speed the process of review, the Rule contains an exception which allows servicers to offer loan modifications based on the review of an incomplete application. To qualify for this exception, the loan modification program must:
- Limit loan term extensions. The loan modification must not extend the loan term more than 40 years from the date the modification is effective.
- Limit periodic payment increases. The loan modification must not increase the borrower’s monthly principal and interest payment beyond the amount that was required prior to the modification.
- Prohibit interest accrual on delayed amounts. If the loan modification allows the borrower to delay payment of any portion of the amount owed until the property is sold, the mortgage is refinanced, the modification matures, or, for FHA insured loans, until the mortgage insurance terminates, then the loan modification must not allow interest to accrue on those amounts. Such amounts could include, for example, forborne periodic payments.
- Be available to borrowers with COVID-19-related hardships. The loan modification must be made available to borrowers experiencing COVID-19-related hardships, although it need not be only available to those borrowers.
- End pre-existing delinquency. The loan modification must end any pre-existing delinquency when the borrower accepts the modification offer. If a trial period applies, the loan modification must be designed to end any pre-existing delinquency when the borrower satisfactorily completes any trial period requirements and accepts the permanent loan modification.
- Prohibit certain fees. The servicer must not charge fees in connection with the loan. Additionally, they must promptly waive certain existing fees that the borrower owes, such as late fees, penalties, or stop-payment fees, that were incurred on or after March 1, 2020.
As long as loan servicers and lenders, follow these new protocols, the CFPB’s Rule will not prevent servicers from initiating the foreclosure process. Loan servicers need to make reasonable efforts to reach borrowers before starting any foreclosure proceedings. If the homeowner is more than four months behind on their mortgage and unresponsive for more than 90 days, then the foreclosure process can move forward. Additionally, if a loan servicer confirms that a property can be classified as abandoned pursuant to local and state law, then they can commence a foreclosure proceeding.
Please note, there are some circumstances specifically not covered by the procedural safeguards in the Rule. First, when the borrower was more than 120 days delinquent prior to March 1, 2020 (pre-COVID). This includes many loans that were already in pre-foreclosure at the time COVID struck and for those cases that have been on hold in the New York State court system. Second, when the foreclosure referral occurs, if permitted by applicable law, on or after January 1, 2022. This exception is in place to make sure this Rule is only temporary in effect, although this date may be changed in a revision to the Rule. Third, if the applicable statute of limitations will expire before January 1, 2022. This exception is meant to prevent the Rule from providing the homeowner with a defense to foreclosure. It does not seek to deny a note holder’s right to foreclose, only to provide a meaningful opportunity for homeowners to have access to loss mitigation before a foreclosure referral.
New York State and Federal Post-Forbearance Repayment Options
Some lenders and servicers were already required by New York State regulations (if the bank is chartered in New York) or by the Federal CARES Act (if your loan is federally by HUD/FHA, VA, USDA, Fannie Mae, and Freddie Mac) to offer specific options at the end of a forbearance period.
If your loan is covered by New York Banking Law, your servicer must offer you three repayment options:
- to extend the term of the loan for the length of the forbearance without additional interest or fees,
- to establish a monthly repayment plan in addition to your regular monthly payments for the remaining term of the loan, or if those options are not available, or
- to negotiate a loan modification, and if a loan modification cannot be agreed upon, the servicer is required to convert the deferred amount to a non-interest-bearing balloon payment, payable when your loan term ends or upon refinancing or sale. Such a balloon payment is paid in a single lump-sum.
If your loan is covered by the CARES Act, meaning they are federally backed, servicers are required to offer loss mitigation options based on the guidance of the agency that backs the loan. Approximately half of all mortgage loans are backed by the federal government mortgage agencies and are funded through government-sponsored entities (GSEs), including FHA, VA, USDA, Fannie Mae and Freddie Mac. Even though a mortgage is federally backed, it is likely administered by one of the more traditional private lenders, such as JP Morgan Chase or Wells Fargo and may be serviced by another company, such as Ocwen, PHH, Mr. Cooper (a/k/a Nationstar) or Carrington.
The federal mortgage GSEs have instructed their servicers to offer a variety of loss mitigation packages. For example, Freddie and Fannie’s primary loss mitigation plan is the COVID-19 Deferral Program. In this program, if the homeowner is able to resume normal monthly payments, then up to a year’s worth of missed payments will simply be added as a zero-interest lump sum payment due at the time the loan is to be paid off. Homeowners who decline the COVID-19 Deferral Plan or are otherwise ineligible may be offered the Flex Modification, which is similar to the HAMP program. In a Flex modification, the homeowner goes through a three-month trial period where the loan is temporary modified. These modifications can include various methods to achieve a modification including the following: capitalizing the missed interest and escrow payments, lowering the interest rate, extending the loan term, and lowering the amount of principal on which interest accrues.
The FHA will also offer its own menu of loss mitigation options. The COVID-19 Standalone Partial Claim gives the homeowner a zero-interest second mortgage loan payable at the end of the loan term. The COVID-19 Owner-Occupant Loan Modification allows missed payments to be capitalized into the principal, the term of the loan extended, and a partial claim second mortgage may be added. Finally, the FHA is offering the COVID-19 FHA-HAMP Combination Loan Modification and Partial Claim with Reduced Documentation which is similar to the prior plan except that there is no trial period and there is less required documentation.
The VA cannot automatically move missed mortgage payments to the end of the loan. However, it will offer loan modifications that extend the term beyond the original maturity date of the mortgage loan. VA allows modified loans to be extended up to 120 months (10 years) or less from the original maturity date on the mortgage note. Additionally, the VA may, under its discretionary authority, re-fund a loan. The VA may buy and take over servicing from a lender when the lender cannot extend satisfactory options to resolve a forbearance. Please note this option will rarely be offered. In most cases, the VA will only pursue refunding if the homeowner had problems making the payments due to circumstances beyond their control. In addition, the VA typically will only pursue this option when it has proof that the homeowner’s financial situation will improve in the near future.
The USDA issued post-forbearance guidance for lenders and servicers to determine if homeowners can resume making regular payments and, if so, either offer an affordable repayment plan or term extension to defer any missed payments to the end of the loan. If the borrower is unable to resume making regular payments, the lender should evaluate the borrower for a loan modification using measures such as term extensions and capitalization. The USDA also has a Mortgage Recovery Advance (a one-time payment from the USDA to help bring the loan current). The Mortgage Recovery Advance is similar to a partial claim and does not have to be repaid until the earliest of when the loan matures, the title to the property is transferred (by sale or by other voluntary or involuntary means), or the mortgage is paid off.
Mortgages That Are Not Federally Backed or Covered by New York State Banking Regulations
What if a homeowner has a mortgage that is not backed by a GSE or covered by New York Banking Law? Many homeowners with privately-held mortgages have also been provided with forbearance agreements during the Pandemic. A homeowner who is in a forbearance agreement that is about to end, should contact their lender or servicer to find out their post-forbearance options. These lenders may have their own loss mitigation programs for borrowers who want to retain their property, including deferment, loan modification, reinstatement or repayment plans. If a homeowner wishes to keep their property post-forbearance, and their lender is unable to offer them an acceptable loss mitigation option, then they may wish to seek protection from foreclosure in bankruptcy.
Post-Forbearance Bankruptcy Options
There are three different ways a bankruptcy can help a homeowner to resolve their missed mortgage payments post-forbearance and protect them from foreclosure: Chapter 13 bankruptcy, Chapter 13 with loss mitigation, and Chapter 7 bankruptcy with loss mitigation. No matter which form of bankruptcy is filed, typically, the filing of a bankruptcy petition provides the debtor with an automatic stay which puts any foreclosure proceedings on hold.
When a homeowner files a Chapter 13 bankruptcy petition, they reorganize their debt. This allows them to pay back their past due mortgage payments and most other debt through a 60-month payment plan that is interest free on most debt. Provided the repayment plan is feasible, this option is available to any homeowner who qualifies. If a debtor files for Chapter 13 bankruptcy with loss mitigation, they pay back their non-mortgage debt in a 60-month payment plan and co-currently enter the Bankruptcy Court’s loss mitigation program. We find that lenders and servicers are often more responsive to such loss mitigation requests as a bankruptcy judge oversees the process. If the loss mitigation process is successful and the debtor is offered a loan modification, the bankruptcy judge must review and approve the modification.
If a debtor who is exiting a forbearance is able to qualify for a Chapter 7 bankruptcy and intends to retain their property, they may want to enter the Bankruptcy Court’s loss mitigation program. In these circumstances, the homeowner’s dischargeable debt will be eliminated without a required payment plan. A bankruptcy judge will oversee the loss mitigation process, and similar to a Chapter 13 with loss mitigation, if the process results in a loan modification offer, the judge assigned to the case will need to review and approve the modification. Furthermore, the Chapter 7 bankruptcy process with loss mitigation is generally faster than that a Chapter 13 case. It can be much more efficient in solving a mortgage issue provided the debtor qualifies under the Bankruptcy Code. While loss mitigation in the Bankruptcy Court, in both Chapter 13 and Chapter 7, does not guarantee a loan modification, it may offer many homeowners the best chance at retaining their property.
Regardless of what type of loan you have, the Law Offices of David I. Pankin, P.C. can help you review all your loss mitigation options in order to resolve your forbearance. We have 25 years of experience in helping New Yorkers save their homes. If you have a mortgage that has a forbearance that is about to end and have questions about your rights or options, please feel free to contact our offices at 888-529-9600 or by using our easy online contact form.