How Borrowers Can Get Flexibility from Lenders to Cope with the COVID-19 Crisis – Next City
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How Borrowers Can Get Flexibility from Lenders to Cope with the COVID-19 Crisis

(Photo by Jeff Turner / CC BY 2.0)

At Flock DC, CEO Lisa Wise leads a family of three companies that manages more than 2,300 rental units scattered across a hundred apartment, condo and co-op buildings, in addition to another thousand single-family properties — all in the District.

With April 1 right around the corner, Wise has already heard from at least one landlord in the group’s portfolio who is willing to cancel upcoming rent payments for tenants who’ve lost income or jobs because of the economic fallout from the COVID-19 health crisis. But she expects that landlord to be the exception to the rule.

“A lot of our portfolio owners, we often call them accidental or one-off landlords, someone one who lived in a unit, maybe they had a condo in the city and then they got married and had a child and they said ‘let’s go ahead and keep this property, rent it out to a tenant and move on with our lives.’ That’s a pretty typical client base for us,” Wise says. “It’s those clients who I think aren’t always as prepared for what it means to carry the risk of someone not being able to make their rent payments.”

Evictions of residential tenants for non-payment of rent aren’t an immediate concern for Wise, since D.C. is one of at least 85 cities and states with eviction moratoria — though in D.C. the eviction moratorium does not apply to commercial tenants. But those tenants are still (technically) required to pay rent, and, with a record of more than 3.3 million filing unemployment last week, millions will struggle to do so. For smaller landlords, like those in Wise’s portfolio, missed rent payments could mean missed mortgage payments.

And landlords are hardly the only segment of borrowers who are now at risk of missing upcoming mortgage or other debt payments. There’s untold numbers of suddenly-out-of-work homeowners with mortgages, or small businesses that are currently closed but still have mortgage or other loan payments coming due.

Federal housing agencies and bank regulators have recently issued guidance to provide flexibility to borrowers who are facing difficulty with upcoming payments because of COVID-19. That flexibility could help homeowners, landlords and small businesses, or anyone who needs at least a partial deferment on their monthly debt payment because of income losses due to COVID-19. But borrowers still have to request flexibility first, and there’s still some uncertainty as to whether those who really need it will get it in time.

“My guess right now is lenders may start needing letters and documentation from landlords to help them understand rents aren’t coming in or tenants demonstrating inability to pay,” Wise says. “That’s part of our responsibility to help them get that paperwork together, So we’re getting ready on our end to start creating as much documentation as we can for folks.”

On March 18, Fannie Mae and Freddie Mac — which together guarantee about half of the U.S. mortgage market — announced temporary suspensions on evictions and foreclosures covering single-family properties in their portfolios. That announcement came with an offer of up to one year of forbearance on mortgage payments for homeowners affected by the COVID-19 crisis. Forbearance means missed payments would simply be tacked on to the end of the existing mortgage term.

Fannie Mae and Freddie Mac followed up on March 24 with an offer of up to three months’ forbearance to multifamily landlords with Fannie- or Freddie-guaranteed mortgages — on the condition that they do not evict any tenant due to missed rent payments as a result of the crisis for the duration of their forbearance period. Freddie Mac, which historically has focused on multifamily properties, anticipates that its forbearance program can provide relief for up to 4.2 million U.S. renters across more than 27,000 properties.

But Julia Gordon is still concerned that the forbearance programs are still going to be difficult to navigate — especially for single-family housing, which technically includes owner-occupied and rental properties up to four units. Gordon is president of the National Community Stabilization Trust, which acquires vacant and abandoned single-family properties around the country and works with small, local developers to put them back into service. The group has helped put more than 27,000 properties back into service since inception in 2008, all of them in neighborhoods hit hardest by foreclosures during and after the 2008-2009 financial crisis.

Gordon says owner-occupants come to own about 80 percent of the properties coming out of her organization’s work, while the rest become rental properties. She’s worried that the mortgage servicing entities who manage the payments on behalf of Fannie, Freddie and holders of mortgage-backed securities sold by either agency still need more clear and consistent guidance to run an efficient, user-friendly forbearance program.

“Every homeowner who will not be able to make their mortgage payment on April 1 needs to contact their servicer immediately. Some of them will be able to do this online. I think most people will need to deal with it by phone and will have to deal with long wait times and potentially confusing phone menus,” Gordon says. “My problem is there’s lots of different variations on the program, and that servicers are doing a little too much case-by-case decision-making. I would just rather have something that is universal, adequate, and easy to get.”

Gordon is hoping that at least one of the COVID-19 stimulus bills will include more clear and consistent guidelines for Fannie Mae and Freddie Mac mortgage servicers and lenders to work through forbearance needs and requests.

“You want the same or pretty much the same solution across all channels, you want that solution to be adequate, which I think right now is six months as a starting position with that being extendable, and you want it to be easy to get,” Gordon says.

Additional legislation or clearer regulatory guidance could create more consistency among forbearance processes for mortgages across the board, including those not guaranteed by Fannie Mae or Freddie Mac.

“Right now the only requirement from [Fannie Mae and Freddie Mac] for landlords to get forbearance is they’re not permitted to evict a tenant,” Gordon says. “If you have a mortgage that’s not from a government channel, the rules could be anything. That’s true not just for landlords but also for homeowners. Some lenders and servicers might be requiring certain documentation that Fannie or Freddie are not requiring.”

In D.C., Wise does not work directly with lenders on behalf of landlords in her portfolio, so she doesn’t know if they have mortgages backed by Fannie Mae or Freddie Mac, but she is preparing her companies to help them navigate the process no matter what.

“We expect to start seeing different needs for people who have all this different documentation — furlough paperwork, unemployment paperwork, whatever that looks like,” Wise says. “Nobody will have been prepared for these things, we’ll have to work with them. All these new documents will have to be created for people to know how to navigate this right now.”

Beyond Fannie Mae and Freddie Mac, and beyond housing, there are calls to suspend payments or forgive many forms of debt as part of COVID-19 relief packages, such as student loans. New York State temporarily suspended payments for medical and student debt owed to the state for higher education, state hospital care, as well as debt relating to oil spill cleanup and removal costs, property damage, and breach of contract, and other fees owed to state agencies.

On March 25, California announced it had negotiated with four of the five major national banks a 90-day forbearance on mortgage payments for borrowers in that state. Puerto Rico also announced a 90-day moratorium on mortgages, personal loans and commercial loans as part of a $777 million relief package.

As for everyone else, federal bank regulators have already extended flexibility to banks so that they can provide flexibility to all borrowers who need it because of COVID-19. On March 22, federal and state banking and credit union regulators and the Consumer Financial Protection Bureau issued a joint statement encouraging institutions to “work constructively with borrowers affected by COVID-19,” as well as providing clarity that forbearance, payment deferrals or other modifications to existing loans in response to challenges related to COVID-19 would be viewed positively, not negatively.

In addition, federal banking regulators issued two additional pieces of guidance, one regarding the potential for banks to get credit under the Community Reinvestment Act for actions taken to support borrowers and communities affected by COVID-19. The other gives banks more flexibility to spend down some of their cash reserves to help deal with the COVID-19 crisis without fear of falling below the required cash reserve threshold. The $2 trillion relief package also slightly lowers that threshold.

At City First Bank in D.C., executive vice president Tom Nida feels that he has all the regulatory flexibility his bank needs right now to deal with the COVID-19 crisis. While it is a small bank, with just $350 million in assets, City First specializes in community development, serving low-to-moderate income communities in D.C., Maryland, Virginia and Delaware. Its borrowers are mainly affordable housing developers, retailers and other small businesses, and nonprofits with community facilities. Nida says the bank started contacting borrowers a few weeks ago, in anticipation of what was to come.

“In our particular case we happen to have a more than adequate capital base and a fair amount of liquidity, so we’re in a pretty good position to work with our clientele and if they need to have some consideration in terms of payment deferrals, waiving of late charges, restructuring occasionally if they need it, we’re prepared to do that,” Nida says.

In order to obtain a loan payment deferral or forbearance from his bank, Nida expects affected borrowers to be able to compare their revenues — including rental income — for this first quarter of 2020 to the first quarter of 2019, showing a significant drop off because of COVID-19.

Of course, he hopes it doesn’t come to that, if grants or other public assistance can fill in any temporary loss of income to households or businesses. City First Bank is one of a cohort of community development lenders who are working with the District government to run a COVID-19 grant program for small businesses, nonprofits and independent contractors or self-employed individuals, offering grants to cover short-term needs during the COVID-19 crisis. The District is currently offering $25 million in total grants, with an application deadline at 11:59 p.m. on March 31. The bank and other lenders will serve as the disbursement agents for the grants.

Nida says the bank has yet to receive a request from a borrower for assistance in the form of forbearance or payment deferral on an existing loan.

“We are communicating to our borrowers, though, about this new grant program, so if they need some immediate relief, it’s a grant not a loan, so we’re making sure they’re fully aware of this as another option before we get into any discussions about tweaking loan terms,” Nida says.

This article is part of The Bottom Line, a series exploring scalable solutions for problems related to affordability, inclusive economic growth and access to capital. Click here to subscribe to our Bottom Line newsletter. The Bottom Line is made possible with support from Citi.

Oscar is Next City's senior economics correspondent. He previously served as Next City’s editor from 2018-2019, and was a Next City Equitable Cities Fellow from 2015-2016. Since 2011, Oscar has covered community development finance, community banking, impact investing, economic development, housing and more for media outlets such as Shelterforce, B Magazine, Impact Alpha, and Fast Company.

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