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Morris Manning & Martin, LLP

The CARES Act: Mortgage Forbearance and Moratorium on Evictions under Secs. 4023 and 4024

04.01.2020

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was signed into law to address the unprecedented public health and economic crisis caused by COVID-19. The CARES Act provides, among other things, financial relief to individuals and businesses, including relief to borrowers of federally backed mortgage loans and tenants residing in such dwellings. This update examines the effect of the CARES Act on multifamily property owners and tenants. 

Sec. 4023: Forbearance of Loan Payments for Multifamily Property Owners with Federally Backed Loans

Section 4023 of the CARES Act permits multifamily borrowers with federally-backed mortgage loans who are experiencing financial hardship due to COVID-19 to request up to a 90-day forbearance (one initial 30-day term and two possible 30-day extensions). Such a request can be made orally or in writing to a borrower’s loan servicer, beginning on the date of enactment of the CARES Act (March 27, 2020) and ending on December 31, 2020, unless the President sooner declares termination of the national emergency regarding COVID-19, then upon such date of termination of the national emergency. This relief applies only to borrowers with certain federally-backed loans, such as Fannie Mae, Freddie Mac, HUD or USDA Rural Housing loans, that are secured by real property comprised of five or more residential units. However, to be eligible, the loans are required to be current as of February 1, 2020. Note that while the express language of Section 4023 excludes “temporary financing such as a construction loan,” certain HUD and USDA Rural Housing construction loans are construction to permanent loans and have 35 year terms, arguably negating characterization as “temporary financing,” although clearly construction loans nonetheless. As a result, the handling of long-term construction to perm loans may still fall under 4023 if such borrowers experience financial hardship as a result of COVID-19.

The forbearance provided under Section 4023 of the CARES ACT clearly includes deferral of principal and interest, but whether it will include taxes, insurance and reserves remains a question. As of the writing of this article, state housing authorities and government agencies were still updating specific policies and implementation tools. While such policies are yet to be determined, it is likely that servicers may request or require borrowers to execute a forbearance agreement, or provide a certification of financial hardship or other proof of financial hardship as a result of COVID-19. It is important to note, however, that the CARES Act does not include details as to how such requests must be made or what requirements lenders may impose, nor does it include a definition or parameters for the determination of “financial hardship.” It is anticipated that the government agencies and lenders, along with the requirements of the secondary mortgage market will fill in those gaps. Section 4023 requires that a borrower make oral or written request “affirming that the multifamily borrower is experiencing a financial hardship during the COVID–19 emergency.” Section 4023 also requires that the servicer, upon receipt of an oral or written request for forbearance, shall “document the financial hardship.” It is unclear at this time whether a borrower’s oral statement that it is experiencing financial hardship due to COVID-19 will alone suffice or if servicers will request (or require) more, but borrowers should expect servicers to request routine documents such as rent rolls, and likely more in order for them to be able to comply with their reporting obligations to investors, Ginnie Mae and their respective government loan program.

Borrowers receiving forbearance relief under Section 4023 may not evict or charge late fees to tenants for the duration of such forbearance, and cannot require a tenant to vacate until 30 days after providing written notice to vacate, which notice cannot be given until forbearance expires. A borrower receiving business interruption or loss of rents insurance claim may be required to apply such amounts first to the amount forborne and then to standard monthly payments.

If a multifamily borrower seeks forbearance relief under Section 4023, it should beware of potentially triggering liability by its affirmation of financial hardship. While the CARES Act permits the request for forbearance, it does not address the impact that such request (which requires affirmation of financial hardship) may have on non-recourse carveout provisions in loan documents or other contracts with solvency-related provisions. As such, borrowers should be careful to characterize the request as being due to a financial hardship resulting from the COVID-19 pandemic, rather than an inability to pay debts as they become due or other indication of insolvency. For further discussion, see here.

Sec. 4024: Temporary Moratorium on Eviction Filings

In addition to the prohibition on eviction under Section 4023 during the term of a forbearance, Section 4024 of the CARES Act separately provides for a 120-day moratorium on eviction proceedings against residential tenants of multifamily and single-family properties with federally backed mortgage loans (i.e., the mortgage on the real property is insured, guaranteed, supplemented or assisted in any way by HUD or any other federal agency, or is purchased or securitized by Fannie Mae or Freddie Mac), or properties that participate in the rural housing voucher program or a housing program under the Violence Against Women Act of 1994. The moratorium began on the date of enactment of the CARES Act (March 27, 2020) and ends 120 days later, on July 25, 2020. During this period, landlords of covered dwellings are prohibited from (a) initiating court proceedings to recover possession of the rental unit for nonpayment of rent or other fees and (b) charging fees, penalties, or other charges related to the tenant’s nonpayment of rent. Further, the landlord may not require the tenant to vacate until 30 days following written notice to vacate, which notice may not be given until after the expiration of the 120-day term.

Notwithstanding Section 4024, which effectively requires landlords of covered dwellings to accommodate tenants’ nonpayment of rent during the covered period, a landlord should nonetheless be aware of rent accommodations that may amount to impermissible transfers under loan documents or breaches of major decisions under joint venture documents. To avoid such a breach, a landlord covered by the Section 4024 moratorium may wish to declare rent due in the normal course (thereby avoiding any inadvertent breach of loan or joint venture documents), but notify tenants of the applicable provisions of the CARES Act and specifically inform tenants that all unpaid rent will accrue and be due at the end of the 120-day term. For landlords who do not fall within the scope of Section 4024, but nonetheless wish to accommodate tenants during this unusual time, they should heed the foregoing considerations and consult lenders, joint venture partners or other contract parties as necessary to avoid inadvertent default caused by rent accommodations. For further discussion addressing nonpayment of rent, see here

If you have any questions about this legal update or any other COVID-19 related issue, please reach out to the authors of this update or your MMM attorney.