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.