In response to the COVID-19 pandemic and mortgage servicers’ feedback, Fannie Mae and Freddie Mac introduced a COVID-19-specific payment deferral program for homeowners on May 14, 2020. This program is in addition to the payment deferral solution, announced on March 25, that was developed at the direction of the Federal Housing Finance Agency (FHFA) for borrowers who became delinquent due to a short-term financial hardship that had since been resolved. While the payment deferral solution announced in March may be used by borrowers with a hardship related to the COVID-19 crisis, it is not limited to such borrowers.
The latest payment deferral program is specifically designed to help borrowers impacted by a COVID-19-related hardship return their mortgages to a current status after up to 12 months of missed payments. It applies to borrowers who have completed a COVID-19-related forbearance plan or who have a confirmed but resolved COVID-19 financial hardship. Beginning July 1, 2020, servicers are required to evaluate and offer payment deferrals to borrowers with resolved COVID-19 hardships who are able to continue making their full monthly contractual payment but cannot afford full reinstatement or a repayment plan to bring their mortgage loan current.
According to the Mortgage Bankers Association’s latest Forbearance and Call Volume Survey, as of May 10, 2020, 8.16% of loans were in forbearance. This percentage is expected to increase, with a more pessimistic view from Black Knight projecting 10.1% of loans entering forbearance by end of May and 11.8% (or 6.3 million mortgages) by the end of June. Given this volume, mortgage servicers need to be prepared to evaluate a significant portion of their loan portfolios for COVID-19 payment deferral as borrowers complete and resolve their pandemic-related forbearance plans.
A Tale of Two Payment Deferral Programs
There are interesting parallels between the two mortgage payment deferral programs, including the following:
- Borrowers with resolved hardships qualify.
- A repayment plan or full reinstatement of the mortgage is not a viable option to cure potential delinquencies.
- Quality Right Party Contact (QRPC) standards, which include determining the reason for delinquency and whether it is temporary or permanent, determining the borrower’s ability to repay the debt, setting payment expectations and educating the borrower on the availability of alternatives to foreclosure, should be followed.
- The borrower has the financial capacity to continue making the existing contractual monthly mortgage payment and does not require a payment reduction.
- Servicers will receive an incentive for each payment deferral.
Additionally, both payment deferral programs fall in the same spot in the loss mitigation evaluation hierarchy or order of workout options, as shown below:
- Reinstatement
- Repayment plan
- Payment deferral/COVID-19 payment deferral
- Flex modification
- Short sale
- Deed in lieu of foreclosure
There are also several key differences that servicers need to keep in mind. The COVID-19 payment deferral program has these unique features that are not in the original program:
- The borrower must be someone who has experienced a financial hardship resulting from COVID-19 that impacted their ability to make their monthly mortgage loan payment but has since resolved that issue.
- The mortgage loan must have been current or delinquent for less than 31 days as of the effective date of the national emergency declaration related to COVID-19, issued on March 1, 2020.
- The mortgage loan must be delinquent 31 days or more, but no more than 360 days delinquent as of the date of evaluation.
- Certain eligibility criteria are not applicable, such as time from mortgage loan origination and rolling delinquency parameters.
- The servicer must defer the delinquent principal and interest payments together with any allowable servicing advances paid to third parties because of the delinquency in the non-interest-bearing balance.
- The deferral term is up to 12 months of deferred payment for COVID-19 payment deferral and 2 months of deferred payment for the payment deferral announced in March.
Another key difference between the two programs is the implementation date. The COVID-19 payment deferral program must be implemented on or after July 1, 2020. For the regular payment deferral program, servicers are permitted to begin evaluating borrowers on July 1, 2020 but the mandatory effective date remains January 1, 2021.
Completing a COVID-19 Payment Deferral
Servicers must complete a COVID-19 payment deferral in the same month in which they determine the borrower is eligible. If the servicer is unable to complete the deferral within this timeframe, the servicer may, at its discretion, use an additional month to allow for sufficient processing time. Servicers must have written policies in place to ensure that the extension of the processing month is applied to all borrowers fairly and equally. Since servicers are not permitted to defer more than twelve months of payments under the COVID-19 payment deferral program, if a processing month is used for a borrower who is already twelve months delinquent, the servicer must require a payment during the processing month. Otherwise, the borrower is not required to submit a payment during the processing month for a COVID-19 payment deferral.
The servicer is required to send the COVID-19 payment deferral agreement (Fannie Mae COVID-19 Payment Deferral Agreement) or its equivalent to the borrower no later than five days after the completion of the COVID-19 payment deferral. Use of the COVID-19 payment deferral agreement is optional; it reflects the minimum level of information that the servicer must communicate to the borrower and illustrates a level of specificity that complies with the requirements in the agencies’ servicing guides.
Additional Considerations: Forbearance Plans and Flex Modifications
If the servicer is unable to establish QRPC with a borrower on a COVID-19-related forbearance plan and the borrower is otherwise eligible for a COVID-19 payment deferral, the servicer must send an offer for a payment deferral within 15 days after expiration of the forbearance plan.
If the servicer is unable to establish QRPC with a borrower on a COVID-19-related forbearance plan and the borrower is ineligible for a COVID-19 payment deferral, the servicer must evaluate the borrower for a flex modification in accordance with the applicable agency’s requirements. If eligible, the servicer must solicit the borrower for a flex modification within 15 days after the expiration of the forbearance plan.
What Servicers Can Do Now
Mortgage servicers continue to face ongoing operational strain. While these new programs will provide much needed relief for borrowers, servicers are going to have to familiarize themselves with these requirements and be ready to implement these programs within the next month and a half. Once servicers are comfortable with the requirements, they will need to create written policies and procedures to make certain that their staff can execute consistently and compliantly. With an agile and disciplined change management approach, servicers can maintain oversight for operational and regulatory compliance while playing an integral role in supporting borrowers during this health crisis, but they must act now to ensure they are prepared.
Given the upcoming mandatory effective date for the COVID-19 payment deferral program, it would be advisable for servicers to implement processes for both payment deferral programs simultaneously and before July 1, 2020 rather than implementing COVID-19 payment deferral first and the regular payment deferral later.
In addition to the implementation of both solutions, servicers must quickly familiarize themselves with the nuances of the programs and how they interact with previously established servicer requirements.
Nick Pellegrini, Senior Consultant with Protiviti’s Risk and Compliance practice, contributed to this content.
