During the Covid-19 Pandemic (the “Pandemic” or “Covid”) many households, that were having difficulty paying the monthly mortgage obligations on their homes, due to economic disruptions caused by the Pandemic, were given temporary relief in the form of “Forbearance Agreements” by their lenders. The CARES Act, passed by the United States Congress on March 25, 2020, provided a forbearance option for all borrowers, of any federally backed mortgage, who experienced a Covid hardship. (For information about the CARES Act, see FN # 1). Forbearance agreements — in the form of both formal written agreements and oral understandings — were readily given in the beginning of the Pandemic, by not only government backed lenders, pursuant to the CARES Act, but also voluntarily by non-government backed lenders, and temporarily excused a certain number of monthly mortgage payments. Forbearance Agreements, were often periodically extended every several months, but usually were only focused on the present emergency, so often lasted between six (6) to eighteen (18) months. While the Forbearance Agreements did not permanently excuse these amounts, they also did not commit the lender or the borrower to any specific method of later repaying the amounts temporarily excused. (For information about Forbearance Agreements given during the Pandemic under the CARES Act, See FN #2 and FN#3, and for information about forbearance of government backed loans under specific government programs, see FN #4 ). The CARES Act ended on December 26, 2020, and while some of the same help it provided, continued as help in other forms and under additional laws and programs, the federal response to the Covid-19 Pandemic, as a crisis focused response, was intense and impressive in terms of resources and size, but at the same time had an inherent expiration. Now, post-Pandemic, the question has been how to deal with these Covid-caused mortgage defaults (hereinafter “Covid Defaults” or “Covid Arrears”), which were often temporarily allowed and to some extent encouraged by widespread and readily available Forbearance Agreements. Could Covid Arrears, now be demanded by the lenders and how could they be demanded? Should lenders be allowed to demand that these Covid Arrears be paid all at once, or over a period of time, or should lenders be required and/or incentivized to put Covid Arrears into a modification agreement, if the borrower is eligible?
The legislative response to the Covid-19 Pandemic was both on a federal and on a state level and often involved cooperation between the federal and state governments, including the Homeowner Assistance Fund (“HAF”), a federal program of $9.961 billion to help households throughout the United States who were behind on their mortgages due to the impact of Covid-19. (See, FN #5 for information about the Homeowner Assistance Fund (“HAF”), a federal program to help homeowners impacted by Covid-19 catch up on mortgage and housing payments). Often the longer term and/or more direct response was handled on a state level. For example, the State of New York had a federally funded program based on HAF, the New York State Homeowner Assistance Fund (“NYSHAF”), which starting on January 3, 2022, began accepting applications in order to distribute up to $539 million in funds to eligible homeowners impacted by the Pandemic to “avert mortgage delinquency, default, foreclosure, and displacement…” The program was intended to give eligible homeowners, with a Covid Default, a grant (not requiring repayment) of up to $50,000. per eligible household. While this program increased its contribution size by increasing the cap per household, it was very short lasting; because it was first come, first serve, it quickly ran out of funds and stopped accepting applications on February 18, 2022, or within a month and a half. (See, FN # 6 for information regarding NYSHAF; and see FN # 7 for the results of NYSHAF ).
The federal government has also sought to encourage lenders to give modification agreements to homeowners with Covid-caused mortgage defaults, with amendments as part of the CARES Act to RESPA’s Regulation-X, which allowed lenders to prioritize and grant “stream-line modifications” for incomplete mortgage modification applications for applicants whose mortgage defaults were Covid-caused. These amendments to RESPA’s Regulation-X, which applied to all residential lenders and servicers, were part of the CARES Act, with the Interim Final Rule (“IFR”) issued by the Consumer Financial Protection Bureau (“CFPB’) on June 23, 2020 (see FN #8 and FN #9 for the CFPB’s IFR). One year later, on June 28, 2021, after comments by mortgage and banking trade associations, the CFPB tempered some of the stricter rules in the IRF and issued the Final Rule (“FR”) to amend Regulation X to assist mortgage borrowers affected by the Covid-19 emergency. (See, FN #10 and FN #11 and FN #12 and FN #13 for for the text and commentary about the CFPB’s FR). These amendments by the federal government to Regulation-X were meant to be temporary, but they expired on December 31, 2021, only six (6) months after the Final Rule was issued. (See, Notification Letter including amendment expiration date, as FN #13). Although many of the federal responses to Covid-19 were crisis oriented and ended with the expiration of the CARES Act and its associated amendments and regulations, their policy encouragement to give Covid-caused defaults a greater opportunity for mortgage modification has been voluntarily incorporated into the decision-making of many mortgage lenders. (See, predictions as to post-pandemic future for mortgage industry, as FN #14)
In the State of New York State (“NYS”), on June 23, 2020, the governor signed into law, Banking Law Section 9-x, which like the Federal Regulation-X, was also meant to deal with Covid Defaults beyond just the initial forbearance agreement response. However, unlike the federal rule, the New York State rule was not meant to be temporary legislation, and is not only still in effect, but also more strongly seems to require lenders to give persons who fell behind with their mortgages, due to Covid-19, both temporary and permanent relief. Unlike the broader, but expired, federal law, NYS’s Rule 9-X only deals with conventional and private loans, where the lender or servicer are registered in New York State, and does not deal with federally backed loans. NYS’s Rule 9-X in 9-X(2)(a)(b) requires lenders to give those with Covid Defaults a forbearance agreement of up to 180 days with a potential extension of another 180 days, “subject to the mortgagor demonstrating continued financial hardship” for a combined 360 days, or almost a year in Covid-based forbearance. Loans subject to NYS’s Rule 9-X were required to have been current on March 7, 2020 (or if in arrears, not yet in foreclosure or accelerated) and to have fallen behind with mortgage payments based on a Covid hardship, during the “covered period” which is March 7, 2020 until December 31, 2021 (or until the date government closures due to Covid ended in the borrower’s county). See, NYS Rule 9-X(a). (See, FN #15 for the text of NYS’s Banking Law Section 9-x, and see FN #16 for Frequently Asked Questions regarding Rule 9-x).
Besides giving temporary forbearance, NYS’s Rule 9-X, under subsection 9-X(3)(a)-(d) requires the lender to give those qualifying under the rule, permanent relief in terms of giving the borrower the option of addressing the above referenced Covid forbearance amount (which is potentially 180-360 days of forborne payments) as follows: (a) an extension of the loan term for the length of the forbearance, without additional interest, late fees or penalties on the forborne amount; OR (b) repaying the arrears on a monthly basis over the remaining term of the loan, without penalties or late fees due to the forbearance; OR (c) negotiating for a “loan modification or any other option that meets the changed circumstances” of the borrower; OR (d) if the borrower and the lender cannot “reasonably agree on a mutually acceptable loan modification” the lender shall offer to defer arrears accumulated during the forbearance period as a non-interest bearing balloon loan payble at the maturity of the loan or when it is satisfied without interest being charged as a result of the forbearance. In Rule 9-X(4), the new law continues to state that, “adherence with this section shall be a condition precedent to commencing a foreclosure action stemming from missed payments which would have otherwise been subject to this section“. (See, commentary about NYS”S Rule 9-X, FN #17 and FN #18 and FN#19). How NYS’s Banking Law Section 9-x plays out and whether it will be broadly and uniformly applied by mortgage lenders to deal with NYS Covid Defaults and whether its compliance will be litigated in NYS courts, in potential, future foreclosure litigation, remains to be seen. (See, warning by NYS Attorney General to Servicers, as FN #20).
These alternative federal and state legal remedies: forbearance agreements, outright grants of the funds in arrears, liberalized standards to modify the loan and/or other remedies for permanent relief to the borrower, including, putting arrears in the back of the loan or paying arrears over additional time or repaying the arrears over the balance of the loan — all depend on the interaction of the borrower, the lender, the government and the courts in arriving at policy and laws to properly address Covid Defaults. The questions below explore what you believe is the appropriate policy and legal approach to Covid-19 related arrears? Is Covid-19, except from its scale, different from other crises? Does government have an obligation to help with Covid related mortgage arrears? If so, in what way, for how long, for how much and in what manner?