April 6,, 2020

917/379-0641
jrosner@graham-fisher.com
Twitter: @joshrosner

The CaresAct: Inequitable Treatment and Misconceptions

There is a lot of concern in the mortgage market about the impact of Sections 4022 and 4023 of
the CaresAct and its impact on non-bank servicers and the Government Sponsored Enterprises
(Fannie Mae, Freddie Mac and the Home Loan Banks). While concern is warranted it is too early
to determine whether the feared impacts will be realized. There are several issues that are worth
clarifying at this time.

What does the CaresAct provide for, by way of forbearance? According to Section (b)(1) of
Section 4022 of the CaresAct: “During the covered period, a borrower with a Federally backed
mortgage loan experiencing a financial hardship due, directly or indirectly, to the COVID–19
emergency may request forbearance on the Federally backed mortgage loan, regardless of
delinquency status”. The plain language of the statute makes it clear that this forbearance/relief
is not a general mortgage holiday. It does not provide relief to anyone and everyone who
desires to stop making mortgage payments. In fact, it requires that anyone who seeks such
forbearance must provide a personal attestation that they have suffered a financial hardship.

The relevant language of the statute (2)(c)(1) states: “Upon receiving a request for forbearance
from a borrower under subsection (b), the servicer shall with no additional documentation
required other than the borrower’s attestation to a financial hardship caused by the COVID–19
emergency and with no fees, penalties, or interest…provide the forbearance for up to 180 days,
which may be extended for an additional period of up to 180 days at the request of the
borrower…”

This language makes three clear points that seem underappreciated: First, that a borrower who
falsely attests to such a hardship is committing fraud under the plan language of the
statute; Second, that the statute provides borrowers, who make false attestations, no
protection from fees penalties or interest; and, Third, that the “covered period” ends when
the President declares an end to the National Emergency.

While these facts are clear it is the job of the President, the Secretary of Treasury, the
Secretary of Housing and Urban Development and the Director of the Federal Housing
Financial Agency (FHFA) to make it clear, immediately, that borrowers who have not
suffered a real economic hardship must not call their loan servicers and request
forbearance and that doing so will expose them to penalties under the law. This is critical to
prevent already overwhelmed servicers from being able to provide the timely and
necessary relief for borrowers who are actually suffering economic hardship. Furthermore,
such clear messaging will help to prevent servicers from a future risk of getting put-backs from
the GSEs and FHA as a result of fraudulent borrowers who, by statute, are not required to submit
proof of such hardship.

Please refer to important disclosures at the end of this report.

Misconceptions about Credit Events and Impacts to Government Backed Mortgages

Contrary to the concerns of many analysts when a borrower receives forbearance, under
the CaresAct, there is no near-term economic impact to any programs of the FHA or the
Government Sponsored Enterprises. While a loan is in statutory forbearance it is treated as
current from a credit reporting requirement and from a delinquency and default perspective.
Remember, a loan is not considered delinquent until 30 days after the payment is due and is not
treated as defaulted until more than 90 days after a payment is due. As a result, there are no
credit risks to the GSEs until more than 90 days after the end of the ‘covered period’ (the end of
forbearance and/or the National Emergency). At that point, loans that have defaulted must be
repurchased, by the issuer, and replaced with a like asset in the securitization.

At that future date, we expect that servicers will require proof that borrowers will suffered
an allowable economic hardship. At that time borrowers who falsely attested to hardship
will be required to repay their debts with penalties and interest and, only then, will
borrowers who did suffer a valid hardship will be have their loans modified. This could, as
example, result in the lender reamortizing the forbeared principal and interest to a new 30-year
term. In theory this would reduce the monthly mortgage payments for borrowers and allow them
to begin to ‘re-perform’ on their mortgages. The lender will then, after these borrowers
reperform for a few months, be able to resecuritize these mortgages. As a result, for most of
these mortgages, the government-backed lender will suffer a liquidity event rather than
meaningful default events. If the National Emergency is declared over in the next two to three
months this should be more than manageable to the government backed programs. Excepting a
dramatically longer emergency period it should not require the GSEs to seek further Treasury
support. In the case of the FHA programs, with their less economically strong borrowers, there
may need to be further government support.

Misconceptions about the GSEs Duties to Servicers

Many pundits are calling for the FHFA to direct the Government Sponsored Enterprises to
provide liquidity support to servicers of their loans. Some have even there were talks, and
Congressional briefings, by the GSEs and FHFA to do so. We do not believe this information is
correct.

To more fully understand the obligations and rights of servicers one has to appreciate the
two types of servicer agreements at issue here. These break down into “actual, actual” and
“Scheduled, Scheduled”.

In an “Actual, Actual” agreement the servicer is not required to advance a borrowers

payments of principal and interest if the principal and interest payments are not received

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from the borrower. Instead, the servicer is only required to send “actual” payments received to
the noteholders. In these agreements, because the FHA or GSE lender guarantees timely
payments of principal and interest, to MBS investors, it is the lender (FHA, GSEs) and not the
servicer who is required to make timely payments to those noteholders.

In “Scheduled, Scheduled” agreements the servicer is required to advance payments of

principal and interest to MBS investors whether or not those payments have been received.
It is because the majority of GSE agreements are on a “Scheduled, Scheduled” basis that
servicers are calling for the Government to provide a liquidity advance facility to the servicers.
But there is nothing in the GSEs contractual agreements with the servicers that requires them to
do so and we are unaware of any precedent or authority for them to do so. In fact, according to
the servicing agreements, if a servicer fails to perform then the GSEs are permitted to replace the
non-performing servicer with one who is able to service the loans according to the contractual
agreement.

Given the unprecedented scale of the demands being placed upon servicers, as a result of the
statutory requirements of Congress, we do believe that such a liquidity advance facility should be
created to support those non-bank servicers who, unlike bank owned servicers, do not have
access to the Federal Reserve’s discount window. The authority to create such a facility does not
rest with the FHFA but rest with the authority of the Secretary of Treasury, as the head of the
Financial Stability Oversight Council (FSOC) and with the Federal Reserve under their
authorities in 13.3 of the Federal Reserve Act. It must be noted that such a facility would provide
liquidity, and not a bailout, to such servicers so that they can affect the Government’s demands
upon them.

Misconceptions about the Duties of the FHFA Over GSEs in Conservatorship

While some pundits are arguing that the FHFA can direct Fannie, Freddie and the Home Loan
Banks to take on more risk, and likely losses, to expand and support the conventional mortgage
market this too is a bit of a false argument and would require the Conservator of Fannie and
Freddie to violate his obligations under the 2008 Housing and Economic Recovery Act Law
(HERA).

Section 1367 of HERA requires that: “The Agency may, as conservator, take such action as
may be… necessary to put the regulated entity in a sound and solvent condition; and
appropriate to carry on the business of the regulated entity and preserve and conserve the
assets and property of the regulated entity.”

If the GSEs were not in conservatorship, the FHFA could approve or direct the GSEs to expand
their credit box or do more to support the market. But, even though they have paid the Treasury
well over $100 billion more than they borrowed during the 2008 crisis, they have been left in
Conservatorship. Since none of these payments have been retained as capital for the GSEs, they

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have remained in Conservatorship for almost 12-years. As a result, the Conservator (Director of
FHFA) is not currently permitted to use the GSEs as loss taking tools of Government policy and
any effort to do so would be a fundamental violation of his duties and would violate the law as
written in HERA.

Misconceptions about the Treasury’s Authorities Over the GSEs

Pundits also suggest the President should fire the Director of FHFA and replace him with
someone who will be more receptive to taking direction, to use the GSEs as tools of emergency
policy, from the Secretary of Treasury. But this view also ignores the 2008 law regarding the
powers of the executive branch, over FHFA when acting as Conservator. Section 1145 of
HERA clearly states: “When acting as conservator or receiver, the Agency shall not be subject to
the direction or supervision of any other agency of the United States or any State in the
exercise of the rights, powers, and privileges of the Agency.”

As a result, regardless of who is the Director of FHFA, Treasury has no authority to direct the
GSEs actions while they are in Conservatorship. Those who suggest that the Director should
be fired also ignore that there is currently a case before the Supreme Court which would, but
hasn’t yet, determine whether the President can even lawfully fire the Directors of the Consumer
Financial Protection Bureau, and by statutory relation, the Director of FHFA.

Disparate Treatment of Bank Owned Mortgage Loans and Non-Bank Servicers

The mortgage borrower relief sections (4022, 4023) of the CaresAct, as written, contains several
flaws that have created disparate treatments of:

- Bank Owned Loan Mortgage Borrowers vs Government Backed Mortgage Loan Borrowers;
- Mortgage Borrowers in Multi-Family Properties vs Mortgage Borrowers in Single Family
Properties
- Bank Owned Servicers vs Non-Bank Mortgage Servicers

Each of these items must be addressed either in a technical corrections bill or, if there is further
legislation, in new legislation.

Bank Borrowers vs Government Backed Borrowers:

While borrowers who have loans issued by Government backed mortgage programs are
eligible for loan forbearance, if they have suffered an economic hardship as a result of the
Covid-19 emergency, there is no such opportunity for borrowers who have suffered such a
hardship but have a bank owned mortgage. This disparate treatment is inequitable to those
low-and-moderate-income borrowers (LMI) who had the misfortune of having mortgages that

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banks chose to hold in their own portfolios. As a result, there is no equivalent standard that
allows these bank mortgagees to receive the same forbearance, without having to prove financial
hardship. While many analysts and legislators argue that banks only retain, in portfolio, jumbo
loans and similar loans from more financially well-off borrowers this assertion is not supported
by the data.

In fact, data shows that banks have significant holdings of mortgage loans by LMI borrowers and
it is incumbent on legislators, not bank regulators, to ensure those borrowers whose
mortgages are owned by banks receive the same (not similar) treatment as borrowers
whose loans are owned by Government backed mortgage programs.

Multi-Family vs Single-Family Borrowers

The mortgage forbearance provided, in the CaresAct, creates disparate treatment for
borrowers who have Government-backed loans on multi-family properties and those who
have Government-backed loans on single-family properties. While this inequity may have
been the result of poor legislative drafting the result appears to be significant. The Supreme
Court plainly and regularly states that it is not the right or responsibility of Courts to read into
legislative language that is not in law. As a result, Congress must correct its language to address
this disparate treatment.

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Section 4022 of the Cares Act, which deals with Government-backed single-family borrowers
and servicers, plainly states the “servicer shall with no additional documentation required other
than the borrower’s attestation… provide the forbearance for up to 180 days, which may be
extended for an additional period of up to 180 days at the request of the borrower”.

The language in Section 4023, which deals with Government-backed multifamily

borrowers and servicers, has entirely different language defining both the required
standard of proof of hardship and the period of forbearance. Section 4023 states: “Upon
receipt of an oral or written request for forbearance from a multifamily borrower, a servicer
shall document the financial hardship; provide the forbearance for up to 30 days; and extend the
forbearance for up to 2 additional 30-day periods upon the request of the borrower”. As a result,
the standard of proof is harder for multi-family borrowers and the length of allowable
forbearance is shorter. Furthermore, where the multi-family borrower’s length of forbearance is
shorter it is also, statutorily terminates at the end of the National Emergency while it is unclear if
the single-family forbearance does. Where Section 4022 extends relief for up to 180-days,
without discussion of the end of the National Emergency, Section 4023 plainly ends the
forbearance at the sooner of: “the termination date of the national emergency concerning the
novel coronavirus dis-ease (COVID–19) outbreak declared by the President on March 13, 2020
under the National Emergencies Act (50 U.S.C. 1601 et seq.); or December 31, 2020”.

This disparate treatment is unfair and implementation will lead to unmanageable application of
the standards offered to borrowers and must be addressed and clarified.

Bank Owned Servicers vs Non-Bank Mortgage Servicers

Both bank-owned servicers and non-bank-owned servicers have mortgage loans that they
service on behalf of Government-backed loan programs but the financial resources
available to them are vastly different and have the effect of picking financial winners and
losers due to the disparate treatment of each. The current national crisis has no precedent in
modern history and has created previously unfathomable burdens on all servicers.

No financial stress-tests could or should have prepared financial institutions to have the liquidity
on hand to prepare for or weather this crisis and no financial institutions in the world have
previously been expected to hold close to a full year of liquidity to handle such a crisis.

That said, all servicers who operate under “Scheduled, Scheduled” agreements are required to
advance, to MBS investors, the principal and interest of mortgagees whether those payments are
or are not received by the mortgagee. If, at the end of the forbearance, the borrower begins to
reperform, the servicer will recapture the advances and there will be no loss. As a result the
impact is, today, a liquidity problem and not a solvency problem. Herein lies the disparate

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treatment between bank-owned and non-bank-owned servicers. Bank-owned servicers, today and
always, have access to the Federal Reserve’s discount window from which they can pledge
allowable assets in return for liquidity advances. Neither the CaresAct nor the Federal Reserve
have provided a similar liquidity facility, such as a Federal Reserve Emergency Window
Facility, to provide liquidity to non-bank servicers. Such a facility is clearly allowed under 13.3
of the Federal Reserve Act but, to date, the Fed has chosen not to provide such a facility.
Instead, it appears that the Fed is choosing to pick winners and losers and using the crisis
to justify wiping out non-bank servicers that it has repeatedly expressed a desire to see fail.
This approach is anathema to our guiding principles of fairness and competition. If the
Federal Reserve, at the Direction of the Secretary of Treasury as the head of the FSOC, fails to
timely create such a facility then Congress must direct them to do so through an amendment to
the CaresAct or through moral suasion.

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