Joseph R. Biden, Jr. was inaugurated as the 46th President of the United States of America on January 20, 2021. With barely enough time to celebrate this major achievement, he rushed to work and signed off on several executive orders and actions on his first day in office. One such executive order included extensions on the moratorium for mortgage foreclosures and rental evictions. Here are the details on this latest executive order, particularly helpful if you are a mortgage lender or servicer attempting to collect on the homeowners’ debts.

Extensions on Mortgage Foreclosure Moratoriums and Forbearance

President Biden issued several executive orders dealing with a wide variety of topics, including climate change, student loan debt, COVID-19 relief and regulations, and immigration. Of particular interest to mortgage lenders is the moratorium extension; request for even further extensions in the future; and updates to the newest forbearance guidelines. With regards to the moratorium, the new order mandates that:

With many reports claiming that the COVID-19 pandemic could continue well into 2021—and some reports even suggesting that it could last into 2022—the economic impact is likely to remain substantial and adverse. Illinois alone approximately has more than a 20 percent unemployment rate since the start of the pandemic. All this job loss and financial strife means more foreclosures, mortgage loan modifications, workouts, and other adjustments to mortgages are bound to occur, at least eventually. With echoes of the Coronavirus Aid, Relief, and Economic Security (CARES) Act signed into law this past March still being felt today, mortgage lenders and mortgage servicers might be considering their responsibilities at this time in offering new—or extending prior—COVID-19 forbearance plans for their borrowers. Here is an overview for your reference. 

Mortgage Lender Responsibilities Per the CARES Act, Then and Now

Provided the mortgage being serviced is federally backed, mortgage lenders and servicers are required by law at this time to offer the following forbearance policies to eligible homeowners:

• The CARES Act enables forbearance of mortgage payments for up to six months in which interest accrues and the payments are only postponed.
• The lenders have the right to extend the forbearance another six months for a total of one year of a forbearance in mortgage payments due to the COVID-19 pandemic.
• During these forbearances, servicers cannot charge fees or interest beyond what would have been provided for with the homeowners’ usual monthly on-time mortgage payments.
• An important new interpretation of the CARES Act from federal regulators confirms that servicers cannot require repayment of the missed mortgage payments in one lump sum at the end of the forbearance.
• When the forbearance period ends, the lender will work with the homeowner to devise a loan modification, workout, or other plan that will allow them to pay back the missed payments over time.

Why Expanding COVID-19 Forbearance Policies Might Be a Good Idea

According to the U.S. House Committee on Financial Services, nearly 70% of all homeowners have federally-backed loans that qualify for these forbearance policies, which means you as a lender technically are not required by law to offer it to all your borrowers. However, despite this, you might want to consider the expansion of your COVID-19 forbearance policy to all homeowners and not just those with federally backed loans. Reasons to do this include:

The coronavirus outbreak in the U.S. is being fought on two fronts: public health and the economy. Government efforts to slow the spread of the virus have caused many Americans to lose their jobs or see their pay drastically cut. Among other expenses, people who are out of work may have more difficulty repaying their debts. Creditors are in a delicate position where they must balance their own interests against the hardships that many debtors are experiencing. As a result, forces in the public and private sector are providing debt relief by allowing some debtors to suspend their payments without penalty.

Government Action

The federal government has recently issued orders in regards mortgages and student loan payments:

• Mortgages that are backed by Fannie Mae, Freddie Mac, and the Federal Housing Administration are eligible for up to 12 months of forbearance.
• Lenders cannot charge late fees on the delayed payments.
• Foreclosures are suspended for 60 days, starting from March 18.
• The proposed stimulus bill would suspend federal student loan payments until Sept. 30.

Various states have enacted similar suspensions on foreclosure and eviction for mortgages that are backed by state programs. As of March 25, Illinois had not announced any mortgage forbearance period.

When a borrower is defaulting or about to default on a loan, the lender can offer to modify the loan agreement to allow the borrower to repay the debt and avoid the consequences of violating the agreement. Loan forbearance is a tool that lenders and borrowers use to temporarily reduce or stop debt payments. The borrower agrees to repay the missed payments at a later date, with interest sometimes added. Forbearance is most often used when a borrower is going through a temporary financial hardship and anticipates being able to catch up on the payments once the hardship has passed. However, forbearance is different from loan modifications, and some of the differences can be advantageous to a lender.

Separate Agreements

With a loan modification, the lender and borrower are changing the original loan agreement to create a new repayment plan that the borrower can adhere to. Loan forbearance is creating a new agreement that temporarily supersedes the original loan agreement. The forbearance agreement should state: