In response to the coronavirus epidemic, the U.S. Department of Housing and Urban Development (HUD) is promulgating a standardized forbearance process to reduce administrative paperwork and expedite processing for multifamily debtors, mortgage lenders, and servicers.
This is in accordance with Title IV Subtitle A, §4023 of the Coronavirus Aid, Relief, and Economic Security (CARES) Act that recently went into effect and will remain applicable until its expiration on December 31, 2020 (unless earlier terminated by the President pursuant to a lifting of the national emergency declaration). Interested parties should reference this guidance when contemplating mortgage relief choices for properties that experience cash flow pitfalls due to reduced rental income as a result of commercial and/or residential tenants’ inability to meet payments in light of the COVID-19 outbreak.
Until the expiration of the covered period, a multifamily debtor with an FHA-backed multifamily mortgage that is undergoing a financial crisis brought about by the viral pandemic may request a forbearance as set forth below. Although it is not a requirement, HUD encourages borrowers to research alternative relief options to correct cash flow shortages brought on by COVID-19 prior to requesting forbearance from HUD. In that regard, HUD will review and promptly approve requests for suspension of Reserve for Replacement deposits, releases from such accounts or Residual Receipts account, or similar initiatives to complete debt service and tax and insurance payments. Lenders are advised to collaborate with their clients to make timely debt service payments, as well as to ask for extensions of elections to assign in the event of a default.
Forbearance Requests & Tenant Protections
Pursuant to the CARES Act, multifamily borrowers with FHA-backed mortgages who were current on their preexisting payments before February 1, 2020 are permitted to contact their servicer and request a forbearance, advising the servicer that the borrower is undergoing financial struggle due to the coronavirus epidemic. Servicers are instructed to document the request and offer forbearance for a period of up to 30 days, which may be renewed for two additional 30-day windows. This may only occur if, among other things, the borrower requests such a renewal at least 15 days before the expiration of the existing forbearance period. Borrowers are free to terminate the forbearance at any point.
Multifamily borrowers receiving forbearance are prohibited from:
- Evicting or starting the eviction process for any tenant on the sole basis of failing to pay rent;
- Charging any form of late fee or other penalty for rental nonpayment;
- Mandating that tenants vacate the property prior to providing him or her 30 days’ notice to vacate; or
- Distributing a notice to vacate prior to the forbearance period expiring.
Additionally, the CARE Act prohibits lessors of a covered dwelling from filing a judicial action to recover possession of a property due to rental nonpayment, or charge fees or penalties to the tenant in the event of nonpayment.
Guidance for FHA-Backed Loans
Any forbearance provided by a lender must be in compliance with the CARES Act, Section 4023(d)2. Lender charges in connection with a forbearance must be reasonable and associated with the existing agreement. HUD will not consider any charge under $750 unreasonable. The amount of forbearance should be customized based on the individual borrower’s claimed financial status. Any further interest charged is negotiable between the lender and borrower, but it is advised to not be in excess of the interest rate of the note. The forbearance agreement may not allow for distributions to be taken for a project while a forbearance is in effect.
Guidance for HUD Loans
HUD Handbook 4530 Chapters 10-11 details the servicing of HUD loans that were assigned to the Department by a lender and defaulted Section 202 Direct Loans. In these situations, HUD is the mortgagee and the borrower can coordinate directly with the Department. Forbearance options by HUD are compliant with the CARES Act. Borrowers should initiate communications with HUD representatives after researching relief options. They are then free to negotiate mortgage modification measures with the delinquent borrower, such as tacking the outstanding payments at the tail end of the mortgage as extended payments, setting a balloon payment, or recasting the mortgage in accordance with the delinquency.
Over the course of the forbearance period, all other material clauses of the HUD loan documents and the FHA Regulatory Agreement remain applicable. Forbearance agreements are not permitted, without separate approval, to require the modification of the associated mortgage or used as a basis to avoid any prepayment penalty owed to the Ginnie Mae security holder. External loans can only be taken upon approval from HUD and must utilize a Surplus Cash Note or Residual Receipts Note. Additionally, forbearance does not prevent borrowers from taking advantage of other options, including interest rate reduction or refinancing via HUD’s mortgage insurance programs or similar financing initiatives.
Guidance for after the Forbearance Window
For FHA-backed, risk share, and HUD-held mortgages, no evictions are permitted during the forbearance window. During the repayment period (described as when a debtor is obligated to make higher payments for a given time frame), evictions are permitted. Debtors are encouraged to enter into payment plans with renters (residential and commercial) that experience an income reduction or temporary loss of household income, but are otherwise able to make up the difference with increased monthly payments over time. HUD Multifamily does not need to approve such arrangements. Debtors are encouraged to explore such measures to address loss of rental receipts so that they can continue to make principal, interest, taxes, and insurance payments to the lender. Priority should be placed on monthly principal and interest payments. However, absent relief from the locality or insurer, taxes, and insurance payments should be made timely.
If a default occurs under the forbearance agreement, lenders should utilize MDDR to document the delinquency in payment and/or other defaults. If a default exists under a forbearance agreement, in which the total forbearance amount becomes immediately due and payable, and if the default remains outstanding for thirty (30) days, the default will be considered a Monetary Event of Default under the HUD Loan Documents.