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Forbearance in the CARES Act: A Review of Issues, Impact, and Mitigation Strategies

by Aspen Grove Solutions

Executive Summary

• On March 27, 2020, Congress passed the Coronavirus Aid, Relief, and Economic Security Act. The CARES Act includes significant sections designed to keep homeowners and renters in their homes.
• Section 4022 of the CARES Act covers all residential mortgages issued, insured, or guaranteed by the federal government or agency (Fannie Mae, Freddie Mac, VA, USDA, Ginnie Mae, or other FHA). It mandates that Servicers must grant forbearance to any borrower “experiencing a financial hardship due, directly or indirectly, to the Covid-19 emergency” (emphasis added).This represents a significant relaxation from prior standards used to assess financial hardship.
• The CARES Act creates significant changes to current forbearance processes for government-backed loans (approximately $6.9 Trillion in asset value).
• The simplified forbearance process is very generous to borrowers and restricts certain types of Servicer diligence, which may result in very high usage of the forbearance option by borrowers.
• Essentially, a Servicer is required to grant up to 6 months forbearance to any borrower upon request, provided that the borrower attest to direct or indirect hardship due to the Covid-19 emergency. This standard is flexible enough that a large portion of the US population could qualify, even those who are not suffering a loss of employment or large reduction in income.
• The CARES Act mandates approval of up to an initial 6-month forbearance period upon request, with 12 months automatically approved upon further request.
• Depending on take-up rate and forbearance duration assumptions, the total value for government backed loans of deferred P&I could exceed $107 Billion, and the total value of deferred Taxes, Insurance, and HOA fees could exceed $48 Billion. Current legislation does not yet relieve Servicers of the requirement to advance these funds.
• There are no updated guidelines for bringing borrowers current after a forbearance period mandated by the CARES Act ends, leaving multiple options on the table.
• A wave of loan modifications is almost certain to result at the end of the covered period, and FHA is likely to offer further guidance to avoid a wave of defaults from harming borrowers, the property market, and its insured portfolio.
• Although Servicers cannot gather documentation for forbearance approval, they may be able to gather documentation after the forbearance is initiated in order to prepare for efficient resolution (including possible modification) after the forbearance period ends.
• Servicers will need to carefully evaluate how they wish to manage non-government backed loans.
• It is likely that properties with forbearance on the loan will require ongoing drive-by property inspections to ensure the property remains occupied, thus adding further cost for Servicers.
• Creating a unified process with proper automation and automated documentation is critical to scaling the operational management of the CARES Act forbearance process, meeting regulatory requirements without challenges, and preparing for the upcoming modification wave at the end of the forbearance period.

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