By Scott E. Munzel, updated May 27, 2020
Both the Federal and State governments have acted to address the coronavirus crisis and its economic impact on real estate issues. Congress enacted the CARES Act, which is designed to help homeowners with mortgages, tenants, and potentially some landlords. Michigan’s Governor Gretchen Whitmer has also implemented several Executive Orders that help tenants.
At the Federal level, because Congress has limited powers to interfere with pre-existing private transactions, the CARES Act only applies to single-family mortgages which have relied on the Federal government in their creation or processing. Luckily, this is the vast majority of single-family residential mortgages in the country. But the CARES Act also applies to mortgages on multi-family properties which have relied on the Federal government in their creation or processing, so it does have a broad reach. At the State level, Governor Whitmer’s Orders focus on protecting tenants, but apply regardless of mortgage status.
Many mortgage borrowers can obtain a “forbearance,” which is a limited delay in their obligation to re-pay the mortgage loan. This forbearance is only available, however, to borrowers whose mortgages that have had some reliance on the Federal government in their creation or processing. These mortgages, defined as “Federally backed mortgage loans,” include mortgages purchased or securitized by the Federal Home Loan Mortgage Corporation (Fannie Mae) or the Federal National Mortgage Association (Freddie Mac). The term also includes mortgages insured 1) by the Federal Housing Administration, 2) under the National Housing Act, 3) by the Department of Veterans Affairs or the Department of Agriculture; or mortgages made 4) under the Housing and Community Development Act or 5) by the Department of Agriculture.
To determine if your mortgage is backed by Fannie Mae or Freddie Mac, you can contact your servicer/lender. Due to high call volumes, you may be unsuccessful or have to wait several hours to speak with a representative. Alternatively, you can visit the Fannie Mae or Freddie Mac websites. Follow the links on those websites to the Covid-19 crisis, and enter the information; the site will confirm or not whether your mortgage is backed by Fannie or Freddie.
Of note, the forbearance is not limited to just owner-occupied residences, and so is also available to owners with a mortgage on second homes and investment properties.
Upon a simple affirmation that the borrower is experiencing a financial hardship due, directly or indirectly, to the Covid-19 emergency, and submitting a request to the loan servicer, the borrower may obtain a forbearance without a fee or penalty. Section 4022(b)(1). In fact, the statute states that the servicer “shall,” with no additional documentation and with no fees or penalties, provide the forbearance. Section 4022(c)(1). As such, it is a broad order that allows many borrowers to obtain a loan forbearance. The period of the forbearance is 180 days, which may be extended upon the borrower’s timely request for an additional 180 days. Section 4022(b)(2). This forbearance is available even if the loan had been delinquent. The borrower can also shorten the forbearance period upon request.
In a typical forbearance, a borrower would not have to pay principal and interest payments on a loan. The legislation states that during the forbearance period, no other fees, penalties, or interest shall accrue other than what would otherwise apply. Section 4022(b)(3). Nevertheless, a forbearance does not reduce or forgive the principal owed, and interest would typically continue to accrue at the loan rate. Moreover, a forbearance would not typically excuse payment of taxes or insurance, so if those are included in a monthly payment which is made to an escrow account, the borrower should consider continuing to make that portion of the monthly payment.
The CARES Act does not contain details about how the forbearance amount is to be repaid, but Fannie Mae issued a letter on May 13, 2020 (LL-2020-07) stating that the amount of delinquency moves to a non-interest bearing balance, which is due at the maturity of the loan, or on the sale or re-finance of the property. Thus, at this time, it would appear the forbearance amount would be due in a lump sum payment at the end of the mortgage loan (or upon sale or re-finance of the property). It is possible Congress will provide specific direction on how that forbearance amount is to be re-paid.
Servicers of “Federally backed mortgage loans” must delay initiating foreclosures, seeking a judgment of foreclosure, or completing an eviction until May 18, 2020. Section 4022(c)(2). (Except for vacant or abandoned property, this prohibition is for ANY reason, not just failure to pay.) While this is only a short delay, it should provide a borrower in distress time to seek the CARES Act forbearance.
Currently, the Fannie Mae direction will prevent any lump sum payments from becoming due at the end of the forbearance period, but push that payment to the end of the loan period. That would help implement the economic assistance Congress intended. Congress may act to simply extend the loan period to allow for the forbearance amount to be repaid over the same time period of the original forbearance period. But borrowers should recognize that forbearance is not loan forgiveness, but simply a delaying tactic. Nevertheless, applied broadly over the entire economy, it may allow the economy to heal without causing excessive mortgage foreclosures.
Another issue is that some servicers may not have caught up with the Federal legislation, and only offer a more limited forbearance, but not offer (or give information on) the 180 day CARES Act forbearance. It might take Fannie Mae and Freddie Mac a few weeks to provide guidance to servicers so that they make this easily available. Hopefully, all servicers quickly provide the CARES Act forbearance to borrowers with qualifying mortgages.
Many tenants will be helped by both the CARES Act and by Governor Whitmer’s Executive Orders.
Section 4024 of the CARES Act places a 120-day moratorium (effectively July 27, 2020) on filing complaints to recover possession of property for failure to pay rent, and prohibits a landlord from charging any fees for the tenant’s failure to pay rent. Again, the CARES Act applies only to mortgages that have relied on the Federal government in their creation or processing, although the moratorium applies to qualifying mortgages on both single-family homes and multi-family structures.
Section 4024(c)(2) then prohibits a landlord from issuing a “notice to vacate” until the end of the moratorium period. In Michigan, recovery of possession for non-payment of rent must start with a “demand for possession” even before a complaint for possession is filed. It is likely that Michigan’s “demand for possession” would be construed as a “notice to vacate” under the CARES Act, and as such, it cannot be delivered until the end of the moratorium on July 27, 2020. Only after the expiration of the seven-day “demand for possession” period (August 3, 2020 at the earliest) can the landlord file the complaint for possession, and then follow the conventional process of recovering possession. So if the underlying mortgage qualifies, the CARES Act pushes off potential eviction until late August.
Governor Whitmer’s Executive Orders 2020-54 and 2020-85 also provide tenants with protection from eviction, on the basis that eviction would expose the tenants to health risks from the coronavirus. In short, the Orders prohibit actual evictions of residential tenants and land contract purchasers for non-payment of rent or land contract payments until June 12, 2020, and applies to ALL residential properties in the State of Michigan, whether or not there is a qualifying mortgage. In that way it is broader than the CARES Act. But the timing of its protection is shorter.
The Orders do not eliminate the tenant’s obligation to pay rent, and allows a landlord to send a demand that rent be paid, through the mail only, but the Orders state that a demand for possession or other threat of eviction cannot be included with that demand for rent. The Orders do not specifically address the formal “demand for possession” that is a prerequisite for filing a complaint for possession in Michigan, but because that “demand for possession” under State law (MCL 600.5714 and .5716) must include a demand for payment and a time to cure, the Order effectively prohibits a “demand for possession” from being delivered until June 12, 2020. This would then delay filing a complaint for possession until at least June 22, 2020, and a likely eviction date sometime in mid-July. That timing, however, depends on the district court’s schedule, which is uncertain at this time.
In Executive Order 2020-70, Governor Whitmer allowed some rental activity to resume; however, the Order only allows personal showings by appointment of “owner-occupied” property. As such, it appears that landlords cannot show rental properties in person to prospective tenants if those properties have current tenants.
In sum, the CARES Act pushes off a potential eviction until August, but only when there is an underlying mortgage that qualifies, while the Governor’s Order applies to all residential properties, but only delays a potential eviction until late June.
Landlords may be helped by the CARES Act in that they may be able to seek a forbearance of the loan repayment, but the CARES Act also reduces landlords’ ability to evict tenants that fail to pay. As such, the CARES Act helps, but also hinders, landlords. Governor Whitmer’s Orders, however, mostly hinder landlords.
Based on the type of mortgage, the CARES Act allows certain landlords with investment properties to request a forbearance for up to one year. This relief, however, only applies to “Federally backed mortgage loans.” As noted above, these are mortgages purchased or securitized by Fannie Mae or Freddie Mac; insured by the Federal Housing Administration, under the National Housing Act, by the Department of Veterans Affairs or the Department of Agriculture; or mortgages made under the Housing and Community Development Act or by the Department of Agriculture. (The loans associated with these mortgages are typically for four or less residential units.) Of course, if this is the type of mortgage, the landlord also must abide by the limitations on evicting tenants as stated above. But Section 4022 would provide the forbearance option.
The landlord may have another type of loan, called a “Federally backed multifamily mortgage loan.” The loans associated with these mortgages are for five or more residential units. Under Section 4023, a borrower with one of these mortgages can request a forbearance, but it is only for 30 days, with 2 extensions of 30 days each. The loan had to have been current before the request, and the standard to prove that the forbearance is needed based on the Covid-19 crisis is higher. And, if a forbearance is granted, the landlord must follow the tenant protection procedures noted above.
Finally, The State Court Administrators and Officers (SCAO) have prepared Form DC 504, which requires that a landlord seeking possession in district court verify that the property is not covered under Section 4024. Whether and how this form may be used remains to be seen, but landlords and their attorneys should be aware of it in case they determine that it should be completed and included with the complaint, or otherwise incorporated in to the eviction procedures.
The Governor’s Orders 2020-54 and 2020-85 do not provide any assistance to landlords, and because they delay evictions based on non-payment of rent, only hinder landlords. Also, Governor Whitmer issued Executive Order 2020-42, which prohibits advertising for or renting short-term vacation properties, except to health care workers dealing with the Covid-19 crisis. The prohibition on rental of short-term vacation properties was continued in Executive Orders 2020-70, 2020-77, and 2020-96. This would negatively impact owners of certain investment properties.
Governor Whitmer did allow some real estate activities to resume under Executive Order 2020-70. Private showings of property are now allowed, but only by appointment and with no more than four people present. No open houses are allowed. And the showings are only allowed for owner-occupied, vacant, commercial, industrial properties, and vacant land. Thus, it appears that showings of tenant-occupied rental properties are not permitted.
It is likely both Federal and State governments will continue to act to address the Covid-19 crisis, and such actions will undoubtedly affect real estate. This evolving situation will require ongoing attention by homeowners, tenants, and landlords.
If you have questions about your rights under the federal stimulus legislation, or need advice about negotiating the terms of your lease, please contact a real estate lawyer in Ann Arbor at PSED.
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