Forbearance Agreements – Everything You Want to Know but Have Been Afraid to Ask
The CARES Act has thrust forbearance agreements into the spotlight. In fact, on April 20, 2020, the Mortgage Broker Association’s latest Forbearance and Call Volume Survey revealed that the total number of loans now in forbearance jumped from 3.74% of servicers’ portfolio volume in the prior week to 5.95% as of April 12, 2020.
A forbearance agreement allows a pause or reduction in mortgage payments for a limited time – it does not erase or forgive debt as the missed or reduced payments will ultimately have to be repaid. The CARES Act provides that, for federally-related mortgage loans, lenders and servicers must grant a forbearance for hardship arising from the pandemic upon the borrower’s request. Rather than requiring the borrower to apply and qualify for forbearance as was the pre-pandemic norm, a borrower may simply communicate an inability to make mortgage loan payments with little or no documentation.
The CARES Act provides that a borrower may receive a forbearance of up to six months. HUD recently clarified that a lump sum repayment for the total missed payments is not necessarily required immediately at the end of the COVID-19 forbearance period. It should also be noted that borrowers may be entitled to other repayment options other than that available under the CARES Act.
Regardless of the CARES Act, lenders and servicers should be reminded that the same core contractual issues should be addressed in any forbearance agreement. The document should address, among other things, the specific forbearance period, interest, payment of taxes and insurance, notice provisions (with lender/servicer and borrower addressees), the requirement that modifications be in writing, and reinforcement that all other conditions, covenants, warranties and representations in the loan documents remain in full force and effect.
There will undoubtedly be significant borrower-initiated litigation post-pandemic based on forbearance agreements, so the best way that lenders and servicers can protect themselves now is to ensure a comprehensive document that leaves no room for interpretation.