Managing Loan Defaults during the COVID-19 Crisis

Melissa Martorella:

Hi everyone. I hope you're all doing well and I hope that you're all staying safe right now. Thank you all for joining us again for today's webinar. Today we'll be discussing COVID-19 and loan defaults - managing loan defaults during the COVID-19 crisis. Before we get started, we do have a couple of housekeeping items. First, we always get these questions throughout. The webinar is being recorded and that will be distributed for you after the webinar. It will also be posted on our website. We'll provide that information later and the slides will also be available. So not only are they part of the recording, but we can also send those to you separately as well. In addition, at the bottom of your screen there is a Q&A box. Please use this to ask us any questions and at the end of the webinar we will go through all of those questions and answer them for you to the extent we can.

There are other options. There's a chat box and a raise your hand window as well. Please don't use those and please only use the Q&A box. It's a lot easier to manage the Q&A box than the others. So a little introduction about who we are. So my name's Melissa. I'm one of the attorneys on the transactional team. With me today is Nema, who's the partner of our team. Typically under normal circumstances, the major thing that we do is we prepare loan documents and we advise lenders how to stay compliant when making loans across the country. In times like this, we can also pivot and so we also end up helping our clients through loss mitigation, including drafting forbearances modifications, helping with foreclosures, and just generally providing strategic guidance to our lenders as they navigate different loan defaults.

Nema Daghbandan:

Alright, so let's spend a little bit of time today to talk about what we are going to be discussing. So up on the agenda we've got kind of understanding what's happening in the marketplace. We are in a interesting position as a law firm where we get to hear from our clients and get some indication of where the market is headed. So that's really what spearheads this webinar as well as our other webinars is just really listening to you and understanding some of the pain points that I think we're collectively feeling. So that's the very first thing we'll do is we'll kind of tee up what's happening here. The second thing we'll discuss here is there's a lot of misinformation and myths as to what is the actual state of forbearances and foreclosures that varies state and federally. And we'll actually do a little bit of myth busting as we call it here because we're getting a lot of questions about, I heard you can't foreclose right now, or I heard you can't do this. So we'll hopefully get an opportunity to provide a little bit of clarity there. The next thing is actually getting very tactical. So what should you do in this situation? So we'll talk about very specific tactical strategies when you're getting these requests in the next coming weeks here to give you an idea of a lay of the land and our recommendations of what to do here.

So let's tee up a little bit about where we're at and what's happening, what we're seeing. So a few weeks ago we started getting, it was really once these lockdown orders started getting put in place, we started seeing this issue rise up, which is specifically borrowers started reaching out to their lenders, identifying and asking whether they could get some sort of forbearance of their payments. Right now there's an expectation I've heard of on the low end of unemployment being around 6% in Q2 to a high end of about 30%. So I think that's really rattling the marketplace right now, and a lot of your borrowers may be affected by that personally or have a fear that that's going to be on the horizon. There's also a lot of uncertainty in the marketplace. We don't necessarily know when this will stop, when we can go back to resuming society as normal. And so that's also leading people to just live in a fearful environment about making payments whatsoever because people don't know what to expect in the upcoming environment.

Melissa Martorella:

So before we launch into what you should be doing now, let's talk a little bit about the traditional default process. So what we mean by that is what would you do in a normal marketplace if you started to have borrower defaults or borrower request for payment forbearances, things like that. So normally the first action that I would take if a lender came to me saying, Hey, my borrower's not making payments, or there's some other default under the loan, I would recommend that we first start with a demand letter to that borrower. And in that demand letter you outline, Hey, here are the reasons for sending this demand letter. These are what the defaults are, either as a payment default, maybe taxes are past due or insurance construction has stopped, some other default has happened underneath the loan documents. And you also give the borrower a timeline to cure that default.

 

If it's a payment default, they might be able to reinstate that loan quickly. Otherwise, if it's something like maturity default, maybe a payoff demand because they can't actually reinstate that loan. So basically you send this demand letter to the borrower outlining what's going on with the current status of the loan and giving them an opportunity, a time period to cure the defaults or fix the issue under a lot of loan documents, including the ones that we prepare in house, the borrower has waived any notice and has waived any right to cure any sort of default like this. That said, we still strongly recommend for best practices that you move forward with a demand letter so that you give the borrower the opportunity to cure so that down the line, if there is any litigation, it looks like you are being a fair lender and you're not taking advantage of your borrower, assuming that that demand letter doesn't work and the borrower doesn't reach out to try to cure the default or otherwise repay your loan.

The next step, the step is to record a notice of default, otherwise start the foreclosure process. This really gets the clock ticking here to get that process moving forward. And really because there is that time pressure, this oftentimes makes your borrower want to come to the table to start talking to you about a potential modification or forbearance under their loan or some sort of other payment plan to get the loan back into performance. So again, strongly recommend in a normal marketplace that this is kind of the way that you proceed when borrowers are in default.

Nema Daghbandan:

And obviously we're not in normal times and that's why we're doing this emergency webinar. So this is very different than your typical advising when we're advising our normal clients. What Melissa just outlined would've been our strategy, but that's really different here. You can't use your traditional mindset as it pertains to foreclosures and defaults right now. So what should you expect right now? Well, the big test is this time period from April one through April 10, we'll figure out and we'll know pretty collectively what's going to happen and how many borrowers are going to just default even if they haven't reached out to you by not making their April one payments. There's also a lot of confusion about whether you are legally required to forebear or give your borrower some kind of payment deferral and we'll clear that up here. And the last thing is those that are being proactive, meaning the borrowers who have already reached out, the most common request that we're really seeing here right now is a temporary request saying, can you postpone the next 30, 60, or 90 days is the most common request that we're seeing here right now. So let's talk a little bit about bifurcating out defaults because when we're getting these calls in right now to a great degree, I'm trying to split apart who is being opportunistic and who is really in need and trying to figure out who is and treating those borrower bases very differently. So the first group of people are people who have already defaulted and people that defaulted on their March one payments. So or effectively these pre-AP April defaults.

In all likelihood, it is unrealistic or it is probably not related to our current covid emergency and that's not necessarily true. That could be unique circumstances. So for example, if your borrower has a business that is directly connected to travel or otherwise that was really contingent upon public meeting places, those sorts of things, it makes sense they were affected earlier than others, but otherwise most businesses and most individuals were not particularly affected as of their March one payment. And also there's a second bucket of people here that we want to think about which are really the people that are habitually delinquent. So if you had a borrower who's already had a checkered track record before all of this, we're going to recommend a different strategy than your call your April one defaulted. So thinking about the second category here, which are payment defaults that occur after April one or on or after April one, you really have to view these on a case by case basis.

I think in a traditional marketplace we would usually counsel our clients and say, come up with your default strategy. What I would mean by that is how many months would you typically let a borrower go without initiating a foreclosure? We'd usually provide guidance, something along the lines of let two missed payments and two grace periods to end. And that was usually our typical guidance before initiating a foreclosure on a file. That sort of policy doesn't really work anymore. You can't kind of have, our company policy is to do this because people's facts are so different. And so really it has to be a case by case basis. So I'm giving you a really basic example here is if you've got a borrower who the collateral is multifamily, there's a pretty high chance that a lot of their tenants have recently been laid off or may not be able to make their April one payments, and so they're really contingent and reliant or similar to a shopping center type loan.

So there's a reality in which a lot of people have very logical circumstances, which they cannot make the payment and they can't make the payment. But similarly, what we're seeing are a lot of people that are quite honestly just acting in a very fearful mindset. And so we're hearing and seeing a lot of traction in which borrowers are saying, I can't make the payment, but in reality, they don't want to make the payment, they're fearful of their future. Quite honestly, most of us are fearful of our future, and so that's not necessarily a good reason to default on your loan. And so in these situations what we'd recommending is, well, let's take a look at the balance sheet. We need to see a copy of your bank statements. We need to see whether you have any liquidity to the degree that you're still well capitalized. You may not want to make the payment, but you're capable of making the payment and you need to treat the borrowers accordingly because effectively as most borrowers will say, my future is uncertain and that isn't necessarily a good enough reason right now.

So what is the most common request that you're going to see? We talked about it a little bit earlier and this is what we've been very much prepping internally. And so when we are preparing forbearances currently the most common request that we're seeing is a 60 day forbearance, meaning you can miss your payment on April one borrower and you can miss your payment on May one. And those payments tend to be getting tacked on to the maturity and we'll talk more about the tactical side of what the forbearance is going to look like, but effectively the most common request we're seeing right now is I really want 60 days of reprieve.

Melissa Martorella:

And now for kind of that myth busting section, before we get into more strategic kind of structuring for these, we've had a lot of people, as NEMO was pointing out earlier, a lot of people reaching out, well, I can't start foreclosure, I have to provide a forbearance. There's a lot of misinformation out there about what does apply to private lenders and what does not. So first on a federal level, the FHFA just issued a 60 day moratorium on foreclosures and evictions. However, this only applies to federally related mortgage loans. So this means that it does not apply to the loans that private lenders are making these business purpose loans. It is a request for other lenders like business purpose lenders to either forebear from starting foreclosures or to provide temporary payment forbearances to their borrowers. But it is not a requirement, it's just a recommendation.

Similarly, on a state level, definitely different states have different restrictions in place. So talking about California here, there's an executive order that came out recently and this provides for a statewide moratorium on evictions. Renters are still required to pay rents under this executive order, but it is a moratorium on evictions and it is a request for lenders not to foreclose on their loans, and that's valid through the end of May. That said, this is not an actual law. It is not ordering anybody to do anything. It is simply a request to all lenders, not to foreclose and not to start that process. So in California you are actually able to start the foreclosure process. There's nothing restricting you from doing so. What does this mean for you? So currently, clearly there's no federal restriction on your ability to foreclose California, you're good to go, but other states do have restrictions.

We talked about them a little bit last week in our other webinar, but a lot of the states in the Midwest and northeast right now do have restrictions. So if you are contemplating a foreclosure or other sort of default process in one of those dates, please reach out to us ahead of time and we'd be happy to walk you through whether you're able to do that or not. But there's also a practical consideration here. So even though in states like California or other states that there is no prohibition on foreclosure, you may not actually be able to complete that process. So as an example in your judicial foreclosure states, so the ones that the mortgage states which require you to go to court to foreclose, it may actually be impossible to complete that process based on the fact that courts everywhere are closing. They're oftentimes only doing emergency actions and hearings.

So it may be that you can start this foreclosure process in those states, but you may not actually be able to complete it based on the court timelines. Similarly, in states like California where there's a non-judicial foreclosure process, you can certainly start the foreclosure. You can record that notice of default, get the timeline started. In California, it typically takes four to five months end to end to do a foreclosure. Assuming no delays, you at least want to get that timeline started. So you want to record your NOD, get the clock ticking. However, there's a practical kind of impossibility here where sales in California and in other non-judicial foreclosure states that requires a public option. And right now there's a ban on public gatherings. So practically speaking, you probably will not be able to actually complete that foreclosure, but at least in these states, you've started the process, you've gotten that timeline going so that when everything clears up in a couple months, hopefully you'll be able to immediately go through with that sale.

Nema Daghbandan:

So let's get a little bit into the tactical side for a second here. So what should you do if you have a borrower who is asking for a temporary forbearance, and we've talked about it a little bit earlier, is first, treat each request differently. Each request has its own merits. The second thing is to the degree that you agree or disagree, it doesn't really matter one way or another. Be very careful about just leaving it as an over the phone conversation. What we learned going through the 2008 crisis is that there was a massive amount of litigation and the challenge of the litigation was basically that the lender had, it was always a misrepresentation claim. The lender promised me that they would not foreclose, that they would give me an extension, that they would give me a modification. The lender promised me all of these things and they did it over the phone.

And so what we learned from that, and what you should be very mindful of here is that you can never leave a phone call without a follow-up writing. And so what is a follow-up writing? Well, we've got here at least an email to your borrower and what should the email state It was good speaking to you on this date. We discussed the following x, y, Z points and as of this time we've in state whatever the conclusion of the call was, we are going to agree to a forbearance. We have not agreed to any sort of forbearance. And then ending the email communication with this does not waive or otherwise modify any of your rights under the loan. What you want is an unequivocal right, and generally these are crazy times. So normally I would advise a client emails in and of themselves are not sufficient and to a great degree that I still agree with that guidance.

That said, at least an email must be going out to your borrowers. In addition to that, if your loan documents will state how do the parties notify one another? There's using an address and says, you can notify your lender at this address and you can notify your borrower at this address and then they'll have this whole section in there dictating When is notice received? Is it when you deposit it in the mail, when you send the FedEx, how do you actually determine when a communication is received by either side? You should follow the formalities of your documents as well. So that same email that you would've presented or sent over should also be sent through US mail or FedEx or whatever communication is required under your loan documents. So one other thing that we'll want to discuss here as well is you want to make sure that you are documenting the decision.

So whether you agree or not agree on providing a forbearance is that right now we have a regulatory environment in which a lot of state regulators including California, so for example the Department of Business oversight in California is recommending lenders forebear during this time period. They're not requiring but they're recommending. And so when you're in this environment in which regulators are recommending this sort of approach and you're choosing not to follow the recommendation, you want to make it very clear as to why you made the decision reasons such as the borrower had sufficient liquidity, the borrower is currently employed, whatever your decision making process was in terms of not offering a forbearance should be well documented. So to the degree that a regulator later comes knocking, you can demonstrate I provided it in these three loans for this reason and I didn't provide it in these other loans for these reasons.

So let's talk a little bit more about the tactical side of if you choose to proceed with a forbearance, what we are likely seeing kind of in the marketplace as the kind of current status. So the first is for those of you that are offering interest only bridge products, we are typically seeing a 60 day forbearance of payments with all amounts being tacked onto the maturity. So what that means specifically is let's say you have a hundred thousand dollars loan and let's say that the monthly payments are $1,000 in each month, so the forbearance would look something along the following borrower, you are not required to make April's payment of a thousand dollars or May's payment of a thousand dollars. Those amounts will be due at maturity, which is going to be in November of 2020 and you will owe us $102,000 at that time because we are going to let you pay those payments at time of maturity, effectively increase the maturity.

We are generally seeing no charge for the actual forbearance itself and we are also not seeing any sort of late charges or default interest accruing on those amounts even though the documents may permit you to do so. It is effectively here is a pass for the 60 day window. And then the last thing that we're seeing is a recommendation is because we don't know the end in sight on this necessarily and we don't necessarily want to document forbearance after forbearance after forbearance is usually the language when we are drafting them is we are including discretionary extensions that the lender can choose. So effectively the lender could send out a follow communication. We are discretionarily permitting another month's worth of forbearance, which will be tacked onto your principal balance and due at time of maturity.

Melissa Martorella:

So now that you know what to do when people are borrowers are asking for a temporary forbearance, the strategy to deal with it, how do you deal with non meritorious requests? So the ones that you're going to deny, Nima talked about it a little bit, making sure that you're documenting why you're not moving forward with the forbearance request, following up with the borrower and writing to explain that decision, but then follow that traditional default process that we talked about at the beginning. Send that demand letter initially asking the borrower to pay up or whatever the situation is before date certain so that they understand what the outstanding defaults are and to how to cure them. You can also consider receivership attachment or other emergency order depending on the court availability. This may or may not be an option, but it is something to keep in mind, especially if something's going on at the property that would require some sort of emergency action on the lender to get access to the property. And then otherwise you file your notice of default, start the clock ticking on your foreclosure process so that way once this whole process or this whole worldwide situation calms down, we're able to move forward with your foreclosures. As a reminder, there's going to be a lot of creditors in this situation now, so to make sure that you have your lien priorities secured and covered through a foreclosure, you want to get that process started as soon as possible.

Nema Daghbandan:

And so what are the key takeaways that we want you to impart with first is if you don't have a strategy, I would highly recommend implementing one because you have two days to create it, right? So what factors you're going to have in place? What documentation do you want? Are you going to send a, is there a form you want to send to your borrowers where they submit why they're requesting this? Right? Get your internal processes ready because you have two days until April one and you will know where the dust will settle by April 10th. The second thing is that I think a lot of people are very skittish about filing an OSSA default and it is definitely our strong advice here that for your non meritorious claims that you should start them. This is particularly important in places where there is a judicial foreclosure process, there are all expectations that the courts will back up.

For those of you that are a member in 2008 and 2009, there was huge log jams in particularly judicial foreclosure states. And so you will definitely want to get in front of the line. Even here in California, we don't know whether the state at some point may stop or impede foreclosure actions from being even initiated. So if you have a non meritorious borrower, you absolutely will want to start your clock for those claims. And the last thing is, this is not a time to be sloppy. We have a lot of our clients who we've seen everything throughout the years of people, whether it's handwritten stuff on napkin kind of stuff to hey here, we agreed to it through an email. These really, if you're going to provide a forbearance then, and even if you're not, everything should be in writing about what you're doing. And if you do choose to go through a forbearance, you absolutely want it to be airtight.

You want to be explaining the story of what happened. You want to make sure that you've got proper releases sitting in those documents. You want to make sure that it's unequivocal about what the forbearance is and is not what happens with the money. Are you charging late charges? Are you waiving default interest? All of those things. You need to be very, very clear in your documentation about what you're doing. There's going to be a lot of litigation that'll stem from this sort of stuff and sloppiness is really going to hurt you during this time period. The next thing here is we're going to continue these rapid response webinars. So after this webinar is done, all of you will receive an email from us. It'll have an article summarizing some of the stuff we've discussed here as well that Melissa and I wrote. That'll also be links for our future webinars. We have one coming up on Thursday and then we have each week we'll have additional webinars really focused on what's happening right now. And so right now we're going to open up the floor for questions. There's already seven questions in the queue which we will answer and you can continue to ask questions. Again, when you're looking at the question and answer box at the bottom of your screen, you can ask a question anonymously or you don't need to be anonymous per se. We'll answer these questions until you guys run out of questions

Melissa Martorella:

And if you have any other specific questions that you'd like to discuss, our email contact information is on this slide, so feel free to reach out to us and we'd be happy to get on a call or follow up with you.

Nema Daghbandan:

Alright, so the first question here is, is it possible to get a copy of this presentation? And yes, both the slides as well as a recording of this webinar will be available shortly. Hereafter, all of you who attended this webinar will get a copy of that email with telling you how to access the slides as well as the recording of this.

Melissa Martorella:

Next question is if the borrower has a good payment history and requests a temporary deferral of their monthly payment, does it have to be documented in the form of a forbearance agreement? If it's mutual agreement through email or oral communication, will that have a negative impact in the event of a foreclosure? So as we talked about just a moment ago, we do expect a lot of litigation to come out of this time period. Even if you are working with your borrowers and you think you have a positive arrangement between the two of you if things go south, oftentimes what happens is there will be some sort of litigation. So we strongly, strongly recommend that if you're going to enter into a forbearance agreement with your borrower that it is documented in writing and not just an email or a phone call. And also making sure that if you're denying that forbearance request, the same thing that you follow up in writing with your borrower.

Nema Daghbandan:

Alright, the next question is, should we let our loan servicer know about our decision and that our borrowers that we're not going to be charging late charges to borrowers? This is a great question because oftentimes there are, for those of you that are investors on the call, you have signed a loan servicing agreement with your loan servicer and oftentimes the loan servicer has a pretty wide discretion about the charging of fees, the splitting of fees, and that sort of information. So the first thing is most loan servicers will honor the terms of a forbearance agreement. They will want to see a written forbearance agreement, but they will honor the terms related to default interest and late charges. But that doesn't mean you should assume that that's always the case. So yes, this is definitely a time you'll want to communicate with your loan servicers about your intent, which is what you want to get done here, and making sure that they are also okay with it. Again, historically speaking, loan servicers are typically fine with it as long as there is a writing in place demonstrating what the agreement is.

Melissa Martorella:

The next question is, should the investor send this letter or communication to the borrower or should the lender's broker? This really depends on who the person is that has the point of contact with the borrower. If it's a passive investor and the broker is really servicing this loan on behalf of that investor may make sense for that broker to reach out to the borrower directly to offer them payment forbearance or send a demand letter. That being said, there's nothing stopping that investor from reaching out directly as well. So in either case, it really just depends on who is the primary borrower facing party.

Nema Daghbandan:

Alright, next question here is what is the difference between a forbearance and a modification agreement? When do you use one over the other or both? And then there's the corollary question to that one, which is, must a second lien holder be notified? So let's break those down. It's actually a very, very, very good question. So the first thing is why a forbearance versus a modification? So a forbearance is typically done when the lender has the right to do something. So for example, if the borrower fails to make payments, the lender generally has the right to accelerate the loan and initiate a foreclosure. They are forbearing from their right to do so. They're effectively temporarily waiving certain rights and they're not changing the terms of the underlying loan whatsoever. They're not increasing the interest rates, they're not a mutual agreement to change the loan terms. There's really just a of rife under the loan if you're going to be doing more under the loan.

So for example, if you're going to offer a decrease in interest rate or if you're going to extend the loan or if you're going to otherwise the terms of the loan, that's not really a forbearance anymore. It's really a modification. So for example, when we brought up earlier that the usual recommended approach right now is the entering of a forbearance agreement and it's usually 60 days and tacking those amounts on at the maturity date, that's also a strategic reason because none of that needs to be recorded. None of that needs to be done through a formal modification. And if you wanted to, for example, extend the amounts or otherwise change the terms of the loan, you really should be doing a modification which should be getting recorded and notarized in the whole bit, and that's also bringing your title carrier involved and really bringing a bunch of administrative processes in versus a simple forbearance which doesn't require all that formal of a process.

This also kind of answers your second question, which is do you need to notify a junior lien holder? Generally speaking, you do not need to notify the junior lien holder for a basic forbearance. So for example, you're agreeing to waive two payments and tachyon to the backend. That would not generally need to be noticed to your junior lien holder, but if you did think so, for example, if you're going to waive a significant amount of payments, if you're going to capitalize interest on those payments or otherwise really jeopardize your junior lien holder, you probably need a modification and that should get the consent of a junior lien holder.

Melissa Martorella:

The next question that we have is when you add the two month forbearance to the maturity, do you charge regular interest on those two payments? So for example, right now, if you're allowing the borrower to defer April and May's payments until the maturity date, are you charging any additional interest on those payment amounts or is it just what they would have been if they had paid on time? Our recommendation is that you just simply defer the payment. So as NEMA kind of gave in an example earlier, if the monthly payment amount was a thousand dollars, you would defer that thousand dollars to the maturity. You wouldn't tack on a late charge, you wouldn't tack on default interest at that time. You could certainly do so tip if your documents allow for it, but knowing the circumstances right now and everything that's going on, you probably want to be as borrower friendly as possible, and so we strongly recommend against charging additional interest or capitalizing that interest or doing any other action like that.

Nema Daghbandan:

The next question here is can the decision between yourself and the borrower to delay payments and catch up later under some sort of payment plan or by putting missed payments at the end be a plain language letter from lender to borrower versus a formal forbearance agreement signed by both the borrower and lender? So let's go ahead and goes back to the lessons learned from previous recessions and I would strongly argue against anything what I would consider sloppy or not clear. So I would absolutely require a forbearance right now because you want to cover a lot of the things that are not stated. So for example, making sure that it's stated in there that all other terms are going to remain the same. You're probably going to want a release of claims against you for any sort of known or unknown claims. You want to make sure it's clear about what's happening with those payments. Are they getting tacked onto the backend? Is interest getting charged on them? Are you waiving late charges for how long are you waiving late charges? So you really don't want this what seems to be a very easy document. For example, like, Hey, we're just waiv two months. You really want to make sure that the parties truly have a meeting of the mind about what they are agree with this time, and that's why we would recommend a real forbearance versus some sort of informal process right now.

Melissa Martorella:

The next question is will you send out a form letter of sorts that should be sent to borrowers on the calls we make or get about their payments? We don't typically have a form letter just as we've kind of walked through here. This is really a case by case basis and you really just need to be digging in on what kind of loan was this when you originated the loan, what's going on now and how does that affect the borrower's ability to make the payments now? So as a big picture, those are the things that you should be asking, but otherwise everything else is really going to be case by case in very fact driven. So if the borrower's telling you, oh, my tenants aren't paying so I can't pay, well, then there's probably a different set of questions and documentation that you need to verify that scenario versus another scenario. So it's really hard to provide a form letter or kind of guide to follow in these situations, but we're always happy to walk you through those situations when they do arise.

Nema Daghbandan:

Next question here. Are any states currently considering permitting public auctions to occur in a new or existing online auction environment? So what we are seeing from a legislative perspective right now, it really isn't headed in this direction. If anything, it's actually headed in the exact opposite direction. So there's a big push by organizations such as California Mortgage Bankers Association and the National Mortgage Bank Association pushing for online notarization to really help permit originations at this time and truly try to help and figure out how to close transactions remotely. So we're seeing a lot of that push, particularly from a legislative front as well as a lobbying front. That's what we're seeing a lot of activity. We are actually seeing quite the opposite. I don't think that people really want to see foreclosures get happen right now. I think that the legislative bodies, if anything, will start gearing up more so and will probably prevent or prohibit foreclosures as this continues on because they effectively think that this is a temporary situation and so if we can let people survive for a little bit, they will get through this versus opening a floodgate of foreclosures right now.

So we actually think that most legislative bodies will actually stop foreclosure activity, if anything in the near determined future.

Melissa Martorella:

Next question is what if we cannot hold payments because the investors need to be paid? Do you have any advice on how to handle the payments as best possible? So the issue here is you absolutely need to let your investors know what's going on. So if the borrower reaches out and says, Hey, I'm not going to be able to make the next couple payments, can you work with me? Whatever, you really need to reach out to that investor to get their alignment on that issue. They may look at the facts and decide, no, not possible. We're going to move forward with a foreclosure or take some other sort of action. Or they may be in agreement with the forbearance route and agree to enter into that the forbearance agreement should technically be signed by the lender anyways. So it's not something that you should just be doing without the lender's consent. And at the end of the day, if you truly believe that the borrower has a legitimate reason to not be able to make payments for a month or two and you want to extend that to them, it may end up being a scenario where you as the broker have to find a way to either buy that loan from the investors or otherwise find a way to kind of restructure that so that you have alignment among all the parties.

Nema Daghbandan:

Next question here, which is, what is the trend nationally with older foreclosures with an auction date in April that is lots of states have a ban on public gatherings. How are these postponements being handled? So we are actually a foreclosure trustee here in the state of California and are experiencing this in real time. So right now you really cannot, for example, once California hold a foreclosure and we're just really providing weekly updates on this. The last guidance we pushed out we said is through April 5th. There will be no auctions at this juncture. Nothing's going to change in that regard and there really still can't hold it In California. There's recent kind of federal activity that's recommending that states continue these sorts of lockdown orders probably through April 30th. We'll kind of see how that goes, but at least for now, we're continuing to operate under a weekly postponement of foreclosure sales. There really isn't an absolute end in sight other than when the states start lifting these executive orders on public meeting places because you really can't host it. The problem is if you try to do a foreclosure auction today in this environment, the sale would not really be valid because they're required to be public under most statutes. And so if anything, you would just have a contestable sale if you try to conduct one today.

Melissa Martorella:

Next question is the federal and state policies you discussed are regarding residential property that are owner occupied only. Will these apply to business purpose loans, non-owner occupied loans? Yeah, so those federal guidelines that we talked about in similar state loans, they're dealing with the federally related mortgage loans, which means typically that these are consumer loans, loans made to people for purchasing their primary residence or other consumer purpose. As we stated that these are recommended practices for private lenders, so business purpose lenders, even owner occupied business purpose loans. But so far these restrictions or moratoriums or guidelines that are in place are only for consumer loans.

Nema Daghbandan:

And I've been reading through a lot of the state specific ones. So on the state specific side, what's really happening or what we're seeing is they're not so much delineating between business purpose or really owner occupied or non occupied. The states that are actually prohibiting it, and I can't remember the list off the top of my head, but I think it's Iowa, Kansas, Massa

Melissa Martorella:

Achievements from Jersey.

Nema Daghbandan:

Yeah, so happy to get connected with people who are in states outside of California as we do have an active list that we're maintaining in the background. But from what I've read of the states that actually are prohibiting foreclosure actions, they are typically tying it to residential collateral. So one to four family property is usually the restriction they are applying it to for the states that have done actual moratoriums.

Next question here is who is responsible to send out the demand letters? Should it be the servicer or the lender? Typically what you're going to see is effectively what does a loan servicing agreement state? So loan servicers should be the party that are interacting with the borrowers to the degree you've retained a third party loan servicer. One of the challenges that I think people run into in these times and why it can be very nerve wracking is I get very nervous for investors who either contact the borrowers themselves or alternatively request their brokers contact the borrower even though they have a third party loan servicer. You really don't want a lot of cooks in the kitchen. You want one uniform voice and you want only one voice that is communicating. And so I would definitely caution people about reaching out to their traditional sources for payment defaults as the litigation from this stuff stems pretty quickly and you want to make sure that you don't have parties misrepresenting that are outside of your control.

Melissa Martorella:

Similar question here. Who is the best party to draw up the default letter in forbearance agreements? Is the foreclosing trustee good for doing these activities? Again, it really depends on, as Nima said, who's reaching out to that borrower and discussing the terms of any potential forbearance. A foreclosure trustee, I suppose, could prepare that document, but you probably want to follow up with them to make sure that kind of activity is within the scope of services. Definitely let that trustee know that that's what you're doing so that they're on the same page with you as far as when to start a foreclosure, what's going on with your foreclosure, but typically a servicer or other attorney preparing that document for you is pretty standard.

Nema Daghbandan:

Yeah, and I'll piggyback on that one as well, which is, this kind of goes to an earlier question that was asked, which is can I just have a basic letter or something like that that gets sent out a forbearance and I can give you examples is we have a very simple forbearance that we use here at the firm that we've really been initiating just for this purpose. And so we try to pull out a lot of our traditional forbearance language. I think our original document was probably eight pages, the new one's five. Just to give you an example, there's still a lot of information in these things. You really do want strong documentation, even if you're trying to make, even if these are for basic transactions, there are still a lot of information that should go into a forbearance because you want to make sure it's absolutely clear of what you guys are actually agreeing to.

The next question here is, should an appraisal be ordered to reevaluate the value of a property prior to allowing a forbearance? In normal circumstances, I'd probably agree with you. A is you have a logistical challenges, so can you even get an appraisal done in this environment? But this also goes back to an initial understanding of every situation's going to look a little different. So if you're really worried about the equity cushion available in your loan, then this might make sense and maybe a condition preceding is you want to make sure you don't end up in massive negative equity territory based on your loan. But that said, we're not really seeing that from our client's perspective, but we're not really seeing a lot of formality being driven on the front end and in a traditional market we really would.

Melissa Martorella:

Next question is, what is your turn time to draft a forbearance agreement for your clients and what are all the documents you would like to have in order to draft these? This is a great question. So it depends on the type of forbearance agreement. If it's just going to be the strategy that we talked about here, a temporary payment forbearance where the payments are deferred until the maturity date, we have a very simple, straightforward forbearance agreement that we're able to draft and it typically can get out the same or next day on that. Otherwise forbearances can be extremely complicated and complex. And so in those events, not only are they more expensive, but typically take more time to draft. But generally the documents that you need in order to draft would be a copy of the note, the recorded deed of trust or mortgage and the terms of your forbearance.

Nema Daghbandan:

Next question here is do you see possible future litigation against private lenders who are not willing to defer payment even though it is not legally required? Great question. That was one of the things that we were really prepping in advance of this webinar was kind of try to make sure that we gave you a cohesive strategy. One of the things we discussed about earlier is more so than ever is documenting with specificity why you chose the strategy you chose in this situation because you really want that as a defense to potential litigation, which was, look, we looked at the specific fact pattern. This had a hundred thousand dollars sitting in their bank account at the time they were still employed, whatever the fact pattern, why did you choose not to offer forbearance during this time period? And then if you can demonstrate that, and comparatively as we did choose to offer in all these different situations, that documentation I think will be really paramount to stave off potential future litigation. I think your concern is absolutely correct, which is particularly when there is this much confusion and you also have major banks are basically saying, we will automatically offer forbearance for those who ask. And so you've got a lot of confusion in the marketplace and that confusion's going to come straight into our court system as well is your average judge probably will not be as up to date about the very specific nuance between who was required and who wasn't. And so you really want to make sure that your documentation is tighter than ever right now.

So the next question here is our firm has a practice of first requiring borrowers to sign a pre negotiation letter whereby they agree the following discussions are not final until fully executed in writing, and they also waive and release the lender from claims. First, do you recommend this approach? And second, have you seen these pre-negotiations letters, challenging court? So yeah, so what the question here is oftentimes in a normal situation is when entering a traditional forbearance, we have what's called a pre-negotiations letter, which is basically a document that says, look, we're willing to enter into negotiations with you. This doesn't mean we're changing the terms of the loan. This doesn't mean we're going to actually agree to anything and until we sign something, there are no agreements in place. So basically setting the tone and oftentimes they have a waiver of claims to protect the lender as well. So first is, should you use these as the standard approach? It's not a bad practice, I think to a great degree, it'll depend what happens on April 10th, how many of these requests are you going to get? Could you have the administrative capacity to use these sorts of letters?

There's not a lot of case law in place to actually demonstrate whether they're effective or not. I like the tone that it sets in the sense that you've got a clear writing in place demonstrating that you have not changed and you're not necessarily going to offer the forbearance. I don't think the release of claims will have a lot of impact down the road versus the actual release of claims that sits in the forbearance because you're not really offering your borrow or anything. And so it's hard to argue that they got real consideration just by offering this letter. But I think, again, it is probably a good practice, but we are seeing people kind of loosen some of the formalities as it pertains to your traditional demand letters and pre-negotiations, particularly in instances in which you're going to be offering a forbearance anyways, or you kind of have a policy in place of saying, look, when people ask and it's meritorious, we're going to give them automatic 60 days, for example.

Melissa Martorella:

Next question is, what are the recommended parameters or documents to review before making the decision for or against forbearance? Again, this is going to be really case by case fact. Like we said, if it's a multifamily property and your borrower is saying, Hey, half of my tenants are now unemployed and can't make their monthly rent payment, so I'm not going to be able to debt service the loan, you might be looking at either email communications from the tenant to the borrower, something like that that confirms that information or otherwise some other form of rent roll review that provides the current status of the leases at the property. There's a lot of different things that you could be looking at, but in general, you really want to match the underwriting that you did at the outset of the loan for how you decided that the borrower would be able to debt service the, and then compare that to the reason now. So does that line up and does that make sense? But again, it's really fact driven.

Nema Daghbandan:

Next question here is, can a percentage of a monthly payment be considered as part of a forbearance or do you need it to be the full monthly payment? So can you offer something less than the full month of forbearance? And it's actually a great question right now you're actually seeing, which is interesting, is I was recently on a credit union webinar related to the same subject matter, and in those loans, most of them are principal and interest. And so a common strategy that's being used in the p and i world is actually just to offer interest only. So yeah, you can absolutely enter into something other than a full month forbearance, and that makes a lot of sense from a fact specific situation. You may have it where one, it's multiple business parties and one of the people in the business was laid off or otherwise, or it might make sense where they're going to have a limited capacity to pay. And so yeah, you can absolutely come up with other options versus an all or nothing approach as it pertains to the amount that they need to pay.

Melissa Martorella:

The next question is, could California change its stance and prohibit foreclosures? Absolutely. They could come out with something today that says, Hey, no more notice of defaults can be recorded. No more sales until such time period. They have not done that. So you can definitely continue now, but if there is any sort of prohibition or change in stance on foreclosures in California, we would absolutely know about that and we would probably do some sort of blast to our clients to advise that this is happening.

Nema Daghbandan:

Next question here is can you provide a boilerplate sample forbearance agreement for the reasons we've articulated earlier is there really shouldn't be a call it a boilerplate. And that's one of the reasons why we probably recommend that you don't use, whether you use our law firm or any other law firm, we don't get, but you should probably use the law firm in these situations because these are very legalistic documents in nature and they should be very fact specific in their application. What happened in this very specific fact pattern? What are we very specifically agreeing to? And so because those facts will change on a loan by loan basis, you really shouldn't have a call it a form that you're using here.

Melissa Martorella:

The next question is the cost of legal for a forbearance agreement, a recoverable cost that can be applied to the loan as a loan charge? Yes, it is. So it's definitely something that you can add to the balance, either require your borrower to pay it upfront or cover that for them and tack that on as well to the maturity date balance due. But it is a recoverable cost for completing the forbearance.

Nema Daghbandan:

In a similar vein, which is does the borrower pay for the forbearance agreement upfront and how much does this usually cost? Yeah, so in a normal environment, we were used to the borrowers paying in advance for any sort of forbearance or modifications. What we're seeing right now is that lenders are using much more discretion on that side, particularly for borrowers that really have nothing to give at this juncture. And so we're kind of seeing a hybrid approach in which lenders are using their discretion about whether the fee should be paid upfront. I can only speak to our own law firm in terms of what we normally charge, and I would say our average cost is somewhere between 500 to 2,500, just depending on the complexity of the underlying document that is being requested to be produced. I don't know how much other organizations normally charge.

Melissa Martorella:

The next question is, are you okay with the forbearance agreement being signed by DocuSign? So in an ideal world, I like everything to be done by hand with a wet signature. That said, a forbearance agreement doesn't have to be notarized, so you don't need an in-person signature. And we understand that times like this, it might be difficult for a borrower to be able to print out the document, sign it, scan it in, mail it in, whatever it is. So obviously being a little bit more lenient on that, you could accept the DocuSign. But again, I think best practices are that you require a wet signature whenever possible.

Nema Daghbandan:

Yeah, and I think the other thing too, to be careful about in the scenario is if your underlying documents require a form of agreements, so for example, mutual writing signed by both parties or whatever, just be cognizant of whatever the original documents stated, what could create a further agreement. Next question here is how to best deal with partial payments and working with your servicer communication is going to be everything right now in terms of particularly those that are working with third party loan Servicers is the very first thing you should do before entering into forbearance is making sure that it's something that your servicer is capable of operating within, right? Remember, if they're servicing thousands of loans right now, so I would say don't get too creative with your approach because they may not be able to support that, especially in this environment. And that's also when we're talking with our loan service or clients, they're really, I think they're probably looking for very specific faxes. For example, Hey, it's 60 days or whatever it's going to look like. It's going to be full payments, something easy for them to understand and digest. You're either waiving everything. So for example, waiving late charges and default interest. What is the approach and kind of a blanket style approach in terms of what that's going to look like versus a very creative and custom payment arrangement because they may not be able to accommodate.

Melissa Martorella:

The next question is not related to this topic. Can we list the house for sale? So I'm assuming this is in the foreclosure kind of context here. So obviously you can go forward, you can move to the notice of sale and get a sale date. However, as far as moving forward with that actual sale date, we recommend you postpone and wait until this time passes and we can have public auctions again. Otherwise, there's nothing prohibiting you right now. If you have an REO or other house that you're trying to list, there's nothing prohibiting you from doing that at that time.

Nema Daghbandan:

Next question here is, if a loan is maturing during this time, is the balloon payment notice sent out by the servicer considered demand? So some loan servicers will send out a kind of a balloon notice in California, it's actually legally required on a lot of loans out here, even for business purpose loans, where within a 90 to 120 day period, you need to actually send out a notice to your borrower saying, look, you've got a balloon coming up, and if you didn't send out that balloon notice, it could theoretically automatically extend the loan. That's really a California specific requirement in terms of legally being required.

But regardless, it's very different than what I would call a demand letter. So the contents of a demand letter, and at least our parlance is that you would state, you're actually stating this amount is due now, right? Here's your principle, your interest, what's actually due, how many days do you have to pay it, right? So usually it's a pre-foreclosure mechanism. So typically it's borrower you April 1st payment, the loan balloon. On this day you have 14 days to pay the entire amount. If you choose not to pay this amount, we will do whatever the action is. We'll file a notice of default, for example. That's traditionally what you would see in a demand letter.

Melissa Martorella:

Next question is another request for a sample of a forbearance agreement to see. Again, these documents are usually pretty customized. We'd be happy to work with you directly if you have a scenario to kind of get a document drafted for you. But otherwise, we don't just have samples that we would circulate.

Nema Daghbandan:

Alright, I think we've already answered this one before, but maybe worth for repeating is, can you add the legal bill for preparing a forbearance to the loan itself? And most loan documents have an enforcement cost provision, and so you'd want to make sure your documents do, I know by default, but when we prepare a set of origination documents, it does have pretty strong language in there that supports this, which is effectively, if the lenders incurring legal fees for the enforcement of the loan, those amounts typically are able to add onto the loan balance and are recoverable. So yes, in most circumstances, most of loan documents will permit you to tack onto any sort of legal fees you've incurred in the process due to a borrower's default.

So next question here is we are requiring the borrowers to at least register for SBA assistance before we enter into negotiations. It's partly because we want to educate them about available resources, but partly to show that the borrower is being proactive. Any issue with asking them to forward their SBA assistance form for our files? That's a great suggestion. That's really wise. I mean, effectively is you've got to a massive period of uncertainty. So some people may be filing for unemployment. Some businesses might be, particularly for your business purpose loans in which they're operating businesses, they're likely going to, they may have government programs such as the FBA programs, and you want your loan at the end of the day is the worst thing to happen is you enter into a 60 to forbearance and there's still no likelihood of success, right? You don't really want a defaulted loan, you want a re-performing loan or a loan that's going to work out. So yeah, absolutely. I think as a precondition, it may make a ton of sense to acquire your borrowers to demonstrate proactivity. And quite honestly, this may be a reason to not into a forbearance because if they have no likelihood of success on the way out of this thing, well then you're really just wasting everyone's time, right? You may want to initiate a foreclosure because there's no probability that this is going to successfully exit.

Melissa Martorella:

The next question is, how do you recommend a lender go about determining whether or not a borrower claim or request is meritorious? From what I gather, it seems you would recommend something written. Have you prepared any written questionnaires for lenders? And lastly, what specific information do you recommend we request? We've answered this a few times, but generally this is a very fact driven scenario. So it's going to depend on, again, what the original loan was for how you underwrote that loan, what the borrower is saying, the issue is at this time for why they will be unable to make the monthly payments under the loan or whatever the other request for forbearance is. So it's really fact driven, aside from telling you to do some due diligence into the reasonings behind that and comparing it to your underwriting. It's really a case by case kind of analysis here.

Nema Daghbandan:

And one thing that we're typically advising our clients of in this situation, which is not normal in these circumstances, is in previous forbearance requests, a lot of lenders would not require copies of bank statements. And I think right now people are really looking to liquidity and saying is, look, you may not want to pay, even though you may have lost your job or otherwise may feel insecure about making payments, but you may be sitting on a significant balance sheet nonetheless, and we still want to get paid from that balance sheet. So we definitely would recommend that. But a lot of it's going to be fact specific. So is this a shopping center loan, right? Do you want see a rent roll? See who's paying on that rent roll? It depends on if there's a single family flip, right? I mean, a lot of this will depend to Melissa's point. What was happening in this underlying loan will determine the strategy for what you should request from them.

Next question here is, is it required to actually record a notice of default? My loan agreements only require that the formal written notices are sent to the borrower and their counsel foreclosure is dictated by every single state. So this question, and I'll give you a flip on that question, which is oftentimes people will say is, oh, I make my borrower sign a deed in lieu of foreclosure at the outset of the loan, right? So when they sign their loan documents, they also have to sign a grant deed to me, which means that if they default, I get to just record that grantee, I get to own the property that does not work in any state. No state cares about, will permit you to kind of give away your rights and completely circumvent their foreclosure regime. States have gone to a great extent to define how to foreclose the process for foreclosure, the statutory rights for all of that, and states are not going to let individuals bypass their regimes for that regard. So oftentimes people, I often, I joke with our clients sometimes that there's all sorts of things in the loan documents that we say you can't do, but in reality, the state of the law is that you can't actually do this. Another example is, can I just throw a receiver on the property without going through the courts? Generally speaking, you can't do sorts of these significant enforcement mechanisms because the state has an interest in protecting owner's rights.

Melissa Martorella:

Next question, can you send out a sample pre-negotiations letter similar to the forbearance samples? These are really case by case fax specific documents. So we'd be happy to, if you'd like to reach out to us directly, we can walk you through what should be included in that pre-negotiations letter review. One that you have, prepare it for you, but we don't just have samples.

Nema Daghbandan:

Next question is, have you heard if the state or local counties are considering deferring property taxes? I think we've heard chatter about this in terms of deferring, because also, for example, California is, I believe April 10th is a deadline or close to there for second installments. We've heard chatter about this. I have not seen, at least in the state of California any movement on this other states and jurisdictions maybe waiving or temporarily forbearing on property taxes.

Melissa Martorella:

The next one, I'm an owner of an apartment with a Freddie Mac mortgage. It is my understanding that Freddie Mac is offering forbearance for multifamily housing. Could you discuss your understanding of this forbearance and how I might take advantage of

Nema Daghbandan:

This? Yeah, so what we're seeing right now in the federal marketplace, particularly for federal agency specific loans, so GST loans for Fannie Freddie is there appears to be actual relief available for these sorts of landlords. I don't know with specificity of the exact level of relief, but I do understand that there are relief programs for agency specific loans.

Melissa Martorella:

And I would just recommend in general, whether it's a Freddie Mac loan student loan, whatever the loan is, reach out to your loan servicer. A lot of times you just have to inquire and they put you directly into the program. So I would definitely reach out to the loan servicer that you have for that.

Nema Daghbandan:

Alright, and the last one, which I'm happy to promote here because that is our dear friend Aaron Norris, who has been awesome to work with. So thank you. Nema, Melissa, we built a process via Microsoft Forms, SharePoint, Excel, Microsoft Flow that allows a borrower to request approval that also, that makes them document needs so effectively a whole workflow system and appears that that Aaron is willing to share that with others, which is really great. Aaron, appreciate you also always helping the community. For those that want to view this, it's www.thenorrisgroup.com. Norris is with two Rs.

/ California / help. I'll repeat that one more time. It's www.thenorrisgroup.com/california/help. Sorry slash California slash help. Alright, and that was our very last question. Thank you all for being on here. Again, we hope all of you are safe. We hope your families are safe. We hope your businesses are okay. We're here for you in this time of need and really just hope that we are offering value to all of you out there. Hope all of you have a great week. Hope you can remain calm in the middle of this storm and hope you're just showing love to one another in unprecedented ways right now.

Melissa Martorella:

Thanks everyone. Feel free to reach out if you have any questions.