Understanding Lenders and What they are doing with Borrowers Who are currently Struggling?
Unlike the 2008 crisis, the lenders and borrowers in this country were not the primary focus of the CARES act and were also not immediately or directed by the current pending pandemic. Instead, it was the airline industry, and businesses with 500 or fewer employees, the travel industry and has hit overall consumerism. However, this does not mean that this industry is immune from the pandemic and ironically will likely be affected but not as immediately as other areas we are seeing go under. For example, Cheesecake Factory (whether you eat there or not) has declared that it will not be able to pay rent to its landlords for the month of April 2020.
While it was not widely published, one small bank in West Virginia has already failed. See this link for more information. (https://www.marketwatch.com/story/fdic-closes-small-west-virginia-bank-moves-deposits-to-mvb-bank-2020-04-04)
So while the 2008/2009 nine market crash was fueled by subprime mortgages and defaults, the current market and borrowers’ economic hardship is being fueled by layoffs and quarantine orders which has done to the market in one month what the great recession took 18 months to do.
What is Really Going on?
Many states, including the State of California, have urged and some banks have agreed to provide 90-day moratoriums. The current position is that participating banks will agree to a 90-day grace period for mortgage repayments. What banks have agreed to do is to add 3 payments onto the end of the maturity date of the loan. For example, if your final payment on your mortgage was due on January 1, 2021, there would be three extra payments in February, March, and April 2021. It should be noted that not all banks have readily agreed to the moratorium, hence it is important to check with your lender to see if they are participating in this.
Another helpful part of this is lenders/banks have also agreed to not negatively report these missed payments to the credit bureau.
Governments and Lenders are somewhat struggling with how to identify the concessions and short-term accommodations being given to borrowers. While loan modifications are not available in the traditional sense, the CARES act has shifted some of the requirements and opened up a loan modification to be reviewed instead as a Troubled Debt Restructuring.
A complete and thorough explanation can be found here: https://www.fdic.gov/coronavirus/faq-fi.pdf
In short, a loan modification is not guaranteed but would result in the lender giving the borrower a “concession.” It appears that what lenders are looking to do is provide short term modifications of for example six months of extensions, forbearance, or deferrals. The fine line here comes to form the fact that the majority of borrowers were NOT experiencing financial distress on their mortgages prior to the COVID-19 pandemic.
This means that the federal and state governments have not yet imposed loan modification standards or requirements on lenders but “are strongly” encouraging lenders to find ways to work with borrowers for short term modifications which can be a hybrid of loan modification for the period of hardship.
Troubled Debt Restructuring (“TDR”) is a short accommodation provided by lenders to borrowers that would not ordinarily be available under the mortgage/contract terms. A TDR is not the same as a loan modification. A TDR usually involves a concession on one of the following:
(a) A reduction of the stated interest rate for the remaining original life of the debt,
(b) An extension of the maturity date or dates at a stated interest rate lower than the current market rate for new debt with similar risk,
(c) A reduction of the face amount or maturity amount of the debt as stated in the instrument or other agreement, or
(d) A reduction of accrued interest
One avenue for lenders and borrowers to qualify for a loan modification is if the lender deems the borrower’s current financial condition to be such that it qualifies as a TDR. Such a determination would allow for short term accommodations to the underlying mortgage debt but would not be considered a traditional loan modification.
A loan modification is a change to the terms of an existing loan by a lender. It may involve a reduction in the interest rate, an extension of the length of time for repayment, a different type of loan, or any combination of the three.
In the current pandemic, there is a lower risk of foreclosure especially with the 90-day moratorium in effect. Lenders will likely voluntarily offer or be federally mandated to offer assistance that will stretch well into 2021. However, a long-term projection of the current pandemic and its long-term impact on the mortgage industry is likely not going to be positive.
However, for now, the State of California has imposed a “no new foreclosure” order which does not allow for any new foreclosure actions to be initiated in the next 60 days.
If the unemployment continues for a longer period, this could result in longer-term delinquencies and eventual defaults on mortgages which then would lead to foreclosure.
In order to best cushion yourself against the risk of foreclosure, it is best to document your hardship with as much detail as possible. This can range from creating a monthly financial budget that shows you are negative each month, to lay off a letter from an employer, to a loss of a spouse’s income. All these items will help when you speak to your lender or servicer.
Finally, it is important to document all communications with your lender/servicer. If you do end up in foreclosure, this correspondence may help provide foreclosure defense to you.
Should you have a question about a loan modification or concern about foreclosure feel free to contact our office at 213-788-4412 to schedule a consult today. You can also e-mail us at email@example.com. We look forward to answering your questions and hope you are staying safe during this unprecedented time.