As I write this blog, we are in the middle of the COVID-19 stay-at-home situation and we, maybe like you, have everyone working from home which has given me a little extra time to keep up with all the new laws and emergency orders coming down.
And what I am seeing is a looming foreclosure trap on the horizon from some things that are going on and it shows an interesting interplay of law, private policies, and public perception. It’s extremely important that homeowners who need help with their mortgage be aware of what is going on.
In late March of 2020, the Federal government passed the CARES Act – which stands for “Coronavirus Aid Relief and Economic Security Act.” This was, of course, in response to a need for economic stimulus in
response to people losing their jobs and livelihood. In addition, numerous states also passed emergency orders with the thought to help people.
Specifically, in regard to Mortgages, the CARES Act and many States as well ordered a 45 day stay on foreclosures. Now, Article 1 of the U.S. Constitution says that the Government, both State and Federal cannot interfere in private contracts – it’s known, not surprisingly, as the Contracts Clause.
So, how can they then put a hold on mortgage foreclosures which are in essence private contracts between a bank and individuals?
There are two different powers at play – one for the Feds and one for the States. The federal government can directly control federally backed mortgages – any Fannie Mae / Freddie Mac loan, and
HUD loan, veteran loans. Those loans are about 65% of all home loans believe it or not. The States, on the other hand, cannot direct or control banks at all.
When the State of Florida, for example, placed a hold on all foreclosures for 45 days – it was exercising control only over the foreclosure lawsuits – it was not going to accept any foreclosure lawsuits at its Courts for 45 days. But, Florida cannot make
mortgage payments not due.
So a couple weeks ago, millions of homeowners heard that there was a stay of foreclosures and perhaps, many people thought they would not have to pay their mortgage for 45 days.
This was trap #1 because for the 35% of homeowners whose loans are not federally guaranteed, there is NO LAW saying that they don’t have to pay their mortgage. Neither the Feds nor the States have the Constitutional power to do that. Sure, the banks can’t foreclose until May 18, but that doesn’t mean they can’t foreclose on the property on May 19 – the day after the Courts begin accepting foreclosure lawsuits again. So that’s trap #1.
The second problem lies in what the CARES Act says about the hold on mortgage payments in regard to the 65% of mortgages it can control. The key word is “forbearance” because that is what the banks are being required to provide homeowners – but nowhere in the Act is “Forbearance” really defined.
This is the 2nd trap because if the Feds do not define “forbearance” then it is left up to the banks to define it.
In my mind, a mortgage forbearance is where you don’t pay the bank for a couple months and then when things get better you start paying again and the amounts you didn’t pay get tacked on to the end
of the loan. But I wasn’t sure about that, so I checked and stumbled across the Chase Bank website definition of “Forbearance.” And per the Chase Bank website, when you are given a forbearance of
“…Forbearance and these protections don’t defer payments until the end of the loan…. When your relief period ends, any missed payments will be due….”
So, in other words, if the bank gives you a forbearance for 3 months and your monthly mortgage payment is $2,000, on month 4, not only is the $2k due but ALSO the $6k you didn’t pay them. And if you can’t come up with the full $8k – the bank has the legal right to foreclose on your home. Let that sink in for a minute. (Crickets)
And yes, I am aware that Chase Bank MAY agree to put the $6k on the end of the loan. It might agree to stretch the $6k out over 6 months. But it doesn’t HAVE to. That’s the point – your home can be taken at the whim of the bank.
Those are two foreclosure traps I see on the horizon – I remember all too clearly what many loan modifications were like back in 2009 and 2010 and what happened when the banks were in control. The only defense people have in these situations is to read the fine print, see exactly what the bank means by forbearance, and don’t assume that you don’t have to pay your mortgage or your rent.
Be careful out there and thanks for reading.