by RICHARD J. LACIVITA, ESQ.

REIMER LAW CO. *

USFN MEMBER (KY, OH, WV)

During the COVID-19 pandemic, the federal government passed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) and the Consolidated Appropriations Act of 2021 (CAA) to address financial distress caused by the resulting economic slowdown. Both acts contained provisions addressing the bankruptcy process and nonpayment by debtors, including new alternatives to address delinquent mortgage payments. By March of 2022, the CARES Act and CAA had sunset. Loss mitigation programs from lenders have filled in the absence created by these two expiring laws. One loss mitigation alternative that has seen increased usage for Federal Housing Administration (FHA) loans is the COVID-19 forbearance coupled with a COVID-19 Recovery Standalone Partial Claim.

            At the outset of the COVID-19 pandemic, the secretary of the Department of Health and Human Services declared a Public Health Emergency (PHE) in late January 2020, pursuant to the Public Health Service Act. A PHE lasts for 90 days and must be renewed to remain in effect. The PHE for COVID-19 has been renewed several times including most recently in Mid-July 2022 and is currently scheduled to expire in October 2022. The end of the PHE is important for FHA loans as it effects the length of COVID-19 loss mitigation programs including forbearances.

Borrowers, who are delinquent on their mortgages due to a COVID-19 related reason, can seek mortgage payment relief through a temporary suspension or reduction of monthly mortgage payments. This temporary suspension or reduction of payments is known as a forbearance. An initial forbearance period, entered into after October 2021, may be up to six months. A borrower can request an additional six months for a total of 12 months of forbearance. No extension period may extend beyond six months after the end of the PHE or September 30, 2022, whichever is later. After the forbearance period, the borrower can be reviewed for COVID-19 Recovery Options, including the partial claim to address unpaid forbearance payments.

            For borrowers in a forbearance who are owners and occupants of the property and can resume making their current mortgage payment at the end of the forbearance period, but cannot afford to pay missed payments, a partial claim could be the best resolution. It allows the mortgage default deficiency to be placed in a zero-interest, subordinate lien against the subject property with no added fees. The terms of the partial claim indicate the mortgaged amount does not require repayment until the borrower makes the last payment on the primary mortgage, refinances the loan, or sells the property; whichever occurs first. Also, the COVID-19 Recovery Standalone Partial Claim is limited to 25% of the borrower’s unpaid principal balance. The borrower enters into a partial claim by executing a new promissory note and mortgage to the secretary of Housing and Urban Development for the amount of the mortgage delinquency. The FHA is part of the U.S. Department of Housing and Urban Development (HUD), which is the reason the partial claim is payable to HUD. The partial claim is not made payable to the present holder of the note and mortgage.

As a servicer or attorney who represents mortgage lenders, there are issues to consider if a debtor in a Chapter 13 Bankruptcy enters into a partial claim. The debtor is entering into a new loan with a new entity, so the partial claim will have to be approved by the court as the debtor is engaged in borrowing. This approval would be accomplished by a motion and order to approve the partial claim and a possible hearing.  These motions have been set for hearings either by opposition from the bankruptcy trustee or the court to determine the effect on the bankruptcy as the loan would be brought current under the terms of the partial claim. The partial claim does not require payment until the loan ends, which is regularly after the bankruptcy concluded, and, thus, would not require payments by the trustee or debtor. For FHA loans, a mortgage forbearance coupled with a COVID-19 Recovery Standalone Partial Claim will be an available possibility to address mortgage delinquencies for the foreseeable future.

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* Law firm is a 2021 USFN Award of Excellence recipient