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How the CARES Act Helps Mortgage Holders

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American homeowners who are falling behind on their mortgage payments during the current economic crisis are looking for relief to the Coronavirus Aid, Relief and Economic Security (CARES) Act, which could temporarily suspend mortgage payments, foreclosures and evictions.

However, not all homeowners may be able to access these resources, and foreclosure rescue schemes may continue to plague certain populations, according to U.S. Government Accountability Office’s WatchBlog, released Wednesday.

Moreover, prolonged distress in the housing market could have a serious negative effect on the housing finance system, it said.

The WatchBlog looked at relief efforts for homeowners under the economic rescue package, including how those efforts compare with federal actions during the 2008–’09 financial crisis. It also discussed potential challenges and risks homeowners could encounter when they seek assistance.

Help for Struggling Homeowners

Today, some 70% of homeowners have federally backed mortgages, including those that are insured by the federal government or are securitized by Fannie Mae and Freddie Mac. These homeowners are eligible for assistance under the CARES Act, according to the blog.

Homeowners who are uncertain whether their mortgage is federally backed can find out from their servicer.

The CARES Act offers those with federally backed mortgages several options:

  • A 60-day moratorium on foreclosures as of March 18
  • A temporary halt to foreclosure-related evictions during the same 60-day period
  • If requested, six months of mortgage forbearance, with the option of extending it for an additional six months — a total of one year

The blog said that in the case of forbearance, servicers are prohibited from charging fees or interest beyond what the borrowers would have to pay if they were making regular payments.

The blog hastened to point out that “loan forbearance is not forgiveness.”

It said that depending on the agreement with servicers, homeowners could be responsible for making a large lump-sum payment to cover the mortgage due at the end of the forbearance period. It said borrowers should ask about this when requesting forbearance.

GAO’s blog warned that foreclosure rescue schemes, which emerged during the 2007–’11 housing crisis, remain an urgent concern for potentially vulnerable homeowners.

In mass joinder lawsuit schemes, for example, scammers using lawyers or law firms promise the homeowner that they can force the lender to modify a loan through a lawsuit.

These schemes require homeowners to pay fees to participate in lawsuits and may leave them in worse financial shape than before, GAO said.

Comparing Federal Crisis Responses

According to the blog, the current economic crisis caused by COVID-19 is different in many ways from that seen during the last recession.

Although unemployment insurance claims suggest that the unemployment rate will be higher than during the previous crisis, market failures — such as the subprime lending debacle — are not driving the current economic downturn.

Yet, some of the efforts to help struggling homeowners are similar. During the 2007–’11 housing crisis, Congress also approved measures to help homeowners who could not pay their mortgages. For example, under the Home Affordable Modification Program, nearly 1 million loans were modified, helping homeowners retain ownership and avoid foreclosure.

At the same time, another 1.9 million borrowers had their application for HAMP denied between 2009 and 2011. Insufficient documentation, borrower ineligibility and mortgage ineligibility were among the reasons those loan modification applications were denied.

GAO’s analysis of HAMP found, among other things, that existing federal foreclosure mitigation efforts could be improved through better data collection and analysis of costs and benefits.

Ready for This Crisis?

The blog noted that the federal government provides major support to the housing market by guaranteeing most mortgages and will play a key role in mitigating the effects of the coronavirus crisis.

But it also pointed out that as a result, the federal housing agencies likely will face additional financial and operational burdens. Ginnie Mae, for example, plans to provide support to mortgage servicers, but has long suffered from risk management and staffing-related challenges.

Because of the federal government’s role in the mortgage market, fiscal exposure to losses in the market remains significant, especially during times of economic stress. A GAO blog post from last summer discussed the need for reform in the housing finance system.

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