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CARES Act Provides Mortgage Forbearance

The $2 trillion CARES Act, signed by the President on March 27, 2020, provides consumer credit and mortgage forbearance to keep people in their homes while the coronavirus lockdown continues.

For homeowners and renters, Title IV of the CARES Act includes mortgage forbearance and renter protection, a foreclosure moratorium, eviction protection, easing accounting standards for borrowers who miss payments, and changes to credit reporting requirements.

Mortgage Forbearance

Borrowers with federally backed mortgages are eligible for mortgage forbearance under Section 4022 of the CARES Act.

Individuals with single-family mortgages may write to their mortgage servicer requesting forbearance for 180 days due to COVID-19-related difficulties. In such a case, no additional fees, penalties, or interest outside of normally scheduled terms may be levied on the borrower. The servicer may extend the period for an additional 180 days at the borrower’s request. The borrower may also request the initial or extended period be shortened. The mortgage servicer may not require any additional documentation of distress outside of the original claim of the borrower. 

Landlords with multifamily mortgages are provided 30 days of forbearance with the option to extend for an additional two 30-day periods (Section 4023). These borrowers also cannot charge any fees or penalties related to rent nonpayment, or late payment, for any tenants on properties funded by multifamily mortgages.

Foreclosure Moratorium

With the exception of vacant properties, the servicer of a mortgage may not initiate a foreclosure, move for a foreclosure or order of sale, or execute a foreclosure sale in the 60 days beginning March 18, 2020 (Section 4022).

Eviction Protection

For 120 days after the enactment of the CARES Act, no tenant residing in a federally subsidized housing or in a dwelling covered by a federally backed mortgage loan can be forced to change dwellings through the filing of evictions by the lessor. The lessor cannot issue an eviction notice until the expiration of the moratorium period (Section 4023). 

Mortgage servicers may not evict anyone in the 60 days following March 18, 2020 (Section 4022). 

Modifications to Generally Accepted Accounting Principles

Banks will not have to recognize loan modifications related to COVID-19 as troubled debt restructurings under the new law (Section 4013). These include forbearance arrangements and changes to interest rates, repayment plans, and other changes in payments. The suspension is applicable for the duration of the modification, but only to the terms directly modified for the COVID-19 outbreak. Loans that were overdue by 30 days as of December 31, 2019 are not eligible. 

Credit Reporting Requirements

Between January 31, 2020 and the later of 120 days after enactment of the CARES Act or 120 days after the end of the national emergency concerning COVID-19, if a borrower is accommodated for making late payments, then the creditor must report the obligation as ‘“current” in credit reporting (Section 4021). If the borrower was delinquent prior to this period and brings the account to current during this period, then they will be reported as “current” in credit reporting. This will not apply to consumers whose loans have already been charged-off. 

The costs of the mortgage forbearance programs will generally be borne by the federal agencies and government-sponsored entities that own or guarantee the loans. However, mortgage market participants have noted that nonbank mortgage servicers now handle close to half of all mortgages. Also, as a team of Fed and other economists pointed out in a recent paper: “Nonbank mortgage companies also need to finance the costs associated with servicing defaulted loans for extended periods of time. Obtaining this financing can be difficult in times of strain.” 

The industry has asked the Fed and Treasury to use other powers in the CARES Act to create a new liquidity facility to support the forbearance policies included in the CARES Act.