On May 14, 2020, Florida Governor Ron DeSantis issued Executive Order Number 20-121, extending his April 2, 2020 Executive Order 20-94 suspending all foreclosure actions through June 2, 2020. While the preamble to Governor DeSantis’ Executive Order makes clear that the purpose is to provide temporary relief to Floridians with single-family mortgages, the Executive Order goes further – it suspends all foreclosure actions, including commercial foreclosures. Though the deadline under Governor DeSantis’s Executive Order is now set to expire on June 2, 2020, a Florida Supreme Court Order on May 4, 2020, limiting court proceedings through May 29, 2020, and suspending jury trials through July 2, 2020, as well as orders from each of the circuit courts, makes clear that foreclosure sales will continue to be suspended for at least the next few weeks.
On April 20, 2020, Colorado Governor Jared Polis laid out an ambitious plan to dramatically reduce the restrictions on personal movement and business operations created by last month’s “Stay-at-Home” Order. Dubbed the “Safer-at-Home” Order, this modification (and others like it in various other states) provided a glimmer of hope to citizens who have been largely confined to their residences since March 26.
The push to safely restart the American economy does not alter the fact that a growing number of businesses have already suffered — and are continuing to suffer — devastating economic losses as a consequence of the COVID-19 public health emergency. They are increasingly looking to their insurance policies for coverage. Despite the well-intentioned efforts of some state legislatures to require insurance companies to pay business interruption claims, it currently appears unlikely that federal, state and local governments will mandate that carriers pay these claims.  Accordingly, the courts will be the primary mechanism for assessing policyholders’ rights to business interruption coverage under their policies. Since late March, more than 75 lawsuits seeking business interruption coverage have been filed against insurance companies. This post will examine one of the seminal cases likely to be relied upon in challenging insurers’ failure to provide coverage under these policies. It will also discuss a recent decision from the Supreme Court of Pennsylvania that should provide plaintiffs some hope as this emerging body of case law develops further.
In response to the severe economic disruptions caused by COVID-19, Congress took unprecedented fiscal steps to inject liquidity into the economy. One of Congress’ most significant actions was the CARES Act, which included the $349 billion Paycheck Protection Program (PPP), providing forgivable loans to businesses to cover payroll expenses. However, the program ran out of money within only two weeks of its launch Congress then replenished PPP funds in a second round of PPP funding that started on April 27. Some reports indicate that a third wave of PPP funds might be on the way as part of anticipated future legislation. 
Frustration over the availability and distribution of PPP funds has begun sparking litigation. In one increasingly common type of such suits, small business owners have sued multiple big banks that administered the PPP funds, alleging various theories of liability. One such case recently was initiated in federal court in Maryland, and epitomizes one of the theories of liability being invoked. In that case, the plaintiffs (small businesses) alleged that Bank of America gave preferential treatment to its existing customers. Under this “gating” policy, BoA purportedly obtained PPP funding for its customers, but delayed processing non-customer applicants, causing them to miss out on funding altogether.  The Maryland federal judge, though, rejected the small businesses’ request to stop BoA from “gating” applicants based on its preferred eligibility requirements. The plaintiffs are now seeking to appeal that decision to the Fourth Circuit Court of Appeals.
A surge in repurchase claims against mortgage originators may be imminent as aggregators and servicers face nonpayment of debt obligations and liquidity shortfalls resulting from an increase in residential mortgage loans put in forbearance. In the coming weeks, it is likely that an unprecedented number of borrowers will avail themselves of mortgage relief provided under the CARES Act. As that number rises exponentially, aggregators and servicers, who are responsible for advancing funds on certain types of loans, will be looking for ways to minimize their losses and transfer risk.
Under Section 4022 of the CARES Act, borrowers of residential loans that are either insured or guaranteed by the federal government, or owned or securitized by government-sponsored entities (“GSEs”), such as Fannie Mae or Freddie Mac, may request postponement of their mortgage payments. This section provides that if a borrower submits a request to the loan servicer, affirming that he or she has a financial hardship that directly, or even indirectly, results from COVID-19, the servicer is obligated to grant the borrower a 180-day forbearance on mortgage payments. This forbearance can be extended up to a period of an additional 180 days, which means that borrowers may effectively defer payments on their mortgage for up to a year. No proof of hardship is required, only an attestation. The loan does not have to be in default status, or even be delinquent, for the borrowers to obtain such relief. During the forbearance period, in addition to not paying principal and interest, borrowers are not responsible for any fees or penalties.
Mortgage loan brokers, correspondents and loan originators (“Originators”) who survived (or, in many cases, are still dealing with) the onslaught of “repurchase/indemnification” claims asserted by loan aggregators and government-sponsored entities (GSEs) (collectively, “Investors”) following the Great Recession are particularly well acquainted with Investors shifting the risk of a loss to the Originators of mortgage loans (“Mortgage Loans”) originated prior to that period. The Investors sought to attribute the fault for what was clearly a global mortgage market meltdown to the Originators.
A proposed class action filed in federal court in California on April 20 demands refunds for all fans who purchased tickets to Major League Baseball (MLB) games that have been postponed indefinitely due to the coronavirus pandemic. The suit, filed against MLB and online ticket sellers StubHub, Ticketmaster, Live Nation, and Last Minute Transactions, may be the first of its kind against a major sports league — but it is one of a rapidly growing number of suits seeking refunds for cancellations and postponements of events and pre-paid reservations.
In the mortgage industry, as in many others, uncertainty abounds as companies attempt to adjust to the “current normal.” One thing residential mortgage loan originators and servicers believe is clear, however, is that they are being unfairly squeezed from several directions during this time of especially fragile economic conditions. Recent government actions, new legislative mandates, and actions by contractual counter-parties have combined to create a real sense of alarm.
What can companies expect from their funding sources as COVID-19 does damage to the economy? In at least some instances, perhaps, opportunistic attempts by lenders to illegally take control of business assets. A real estate investment trust (REIT) in New York alleges in a new lawsuit that it has already fallen victim to that type of misconduct.
AG Mortgage Investment Trust Inc. (AG) filed suit against the Royal Bank of Canada (RBC) on March 25 for allegedly taking advantage of the pandemic to unlawfully seize the trust’s assets and sell them at below-market prices. AG says RBC is just one of many banks that are now trying to trigger margin calls on entities like AG. It alleges that RBC is doing so by applying “opportunistic and unfounded” markdowns on mortgage-based assets. A margin call then occurs, according to AG, with RBC contending that the value of a margin account — an investment account with assets bought with borrowed money — has fallen, requiring the borrower either to make up the difference with more collateral or have the asset seized. RBC, the suit further alleges, is being unreasonable in its valuations. Having seized assets based on what AG calls an “entirely subjective and self-serving calculation” of true market value, RBC then auctioned off $11 million worth of AG’s commercial mortgage-backed securities.
Earlier this week, we noted that COVID-19 might be the pin that bursts a corporate debt bubble. Unfortunately, corporate debt is not the only type of debt poised to explode, particularly under mounting pressure from COVID-19 and the economic downturn that is likely to follow in its wake. Though we have no desire to be prophets of doom, here are three other candidates for asset-based debt debacles in the near term, each of them likely to spur a lot of litigation activity:
As the world grapples with the health threat posed by the novel coronavirus (COVID-19), the secondary threats of the coronavirus—including economic and financial consequences—have come into clear view. Markets in the United States and the broader world tanked last week, including the worst day for the Dow Jones Industrial Average since “Black Monday,” October 19, 1987. The Dow ended last week on an upswing, but fell dramatically again yesterday (though it is rebounding somewhat as of this morning). Overall, the swift fall of both the Dow and the S&P 500 from all-time highs in February to bear territory this past week has raised concerns of a prolonged recession.
The emergency rate cut by the Federal Reserve in early March received a lot of attention, as did the resulting downward pressure on mortgage rates. Just over a week ago, the rate for a 30-year fixed mortgage had fallen all the way to 3.13%. Yet, at the end of last week, the rate jumped back up to 3.65%. Then at the beginning of this week, the Federal Reserve took even more drastic steps, cutting the benchmark interest rate all the way to zero and buying $700 billion of assets, including treasury bonds and agency residential-backed mortgage securities. The whip-saw effect of this health crisis—on the one hand, creating downward pressure on interest rates, and on the other hand, chilling the real estate market by, among other things, causing potential buyers to avoid open houses—will remain worthy of close scrutiny.