COVID-19 Impact on the Affordable Housing Industry
briefing by Jamie Parsons, CPA
The COVID-19 crisis is impacting individuals, businesses and industries across the world. The affordable housing industry has not escaped this crisis. As many tenants have suffered job losses, the most significant challenge for the affordable housing industry is the ability to sustain sufficient rental income.
On March 27, 2020, the President signed into law the Coronavirus Aid, Relief and Economic Security Act (the CARES Act), the basis for a massive ($2.2 trillion) stimulus for the US economy. Sections 4023 and 4024 of the CARES Act provide relief to many multifamily borrowers and its tenants.
SEC. 4023. FORBEARANCE OF RESIDENTIAL MORTGAGE LOAN PAYMENTS FOR MULTIFAMILY PROPERTIES WITH FEDERALLY BACKED LOANS.
Section 4023 allows for a multifamily borrower with a federally backed multifamily mortgage loan who is experiencing a financial hardship, directly or indirectly, due to the COVID-19 emergency to request forbearance. Such requests may be submitted to the borrower’s servicer verbally or in writing. The mortgage loan must have been current on its payments as of February 1, 2020.
Federally Backed Multifamily Mortgage Loan Definition
The term “Federally backed multifamily mortgage loan” includes any loan (other than temporary financing such as a construction loan) that―
- is secured by a first or subordinate lien on residential multifamily real property designed principally for the occupancy of 5 or more families, including any such secured loan, the proceeds of which are used to prepay or pay off an existing loan secured by the same property; and
- is made in whole or in part, or insured, guaranteed, supplemented, or assisted in any way, by any officer or agency of the Federal Government or under or in connection with a housing or urban development program administered by the Secretary of Housing and Urban Development or a housing or related program administered by any other such officer or agency, or is purchased or securitized by the Federal Home Loan Mortgage Corporation or the Federal Mortgage Association.
Upon receipt of an oral or written request for forbearance, the servicer shall:
- Document the financial hardship;
- Provide forbearance for up to 30 days; and
- Extend the forbearance for up to 2 additional 30-day periods upon request of the borrower provided that such request is made
- During the covered period (“covered period” means the period beginning upon enactment (March 27, 2020) and ending on December 31, 2020 or, if sooner, the termination date of the COVID-19 national emergency as declared by the President); and
- At least 15 days prior to the end of the original/previous 30-day period
A multifamily borrower shall have the option to discontinue the forbearance at any time.
Renter Protections During Forbearance Period
A multifamily borrower that receives a forbearance under this section may not, for the duration of the forbearance―
- evict or initiate the eviction of a tenant from a dwelling unit located in or on the applicable property solely for nonpayment of rent or other fees or charges; or
- charge any late fees, penalties, or other charges to a tenant described in paragraph (1) for late payment of rent.
- require a tenant to vacate a dwelling unit located in or on the applicable property before the date that is 30 days after the date on which the borrower provides the tenant with a notice to vacate; and
- issue a notice to vacate until after the expiration of the forbearance.
Terms of Forbearance Agreement
A forbearance agreement must be entered into between the borrower and the lender. The forbearance agreement must be in compliance with the requirements of the Cares Act, however, various agencies have or will develop their own prescribed forms. It is important to understand the terms. Based on a review of Fannie Mae’s form of forbearance agreement, below are some key terms of the agreement to note:
- The borrower is required to represent that the operating and financial performance of the Property have suffered a hardship as a result of the Health Crisis. The borrower should be clear in such representations that the hardship is related to the COVID-19 health crisis rather than just a statement of the inability to pay the mortgage note, as such statement could give an indication of insolvency.
- The forbearance is conditioned upon the borrower’s cooperation with and providing monthly reports such as rent rolls, collection reports, monthly operating statements.
- The borrower shall bring the loan current upon receipt of Business Income (business interruption/rent loss) insurance proceeds or upon receipt of any other financial relief or assistance available from any other source including, but not limited to, any local, state or federal government assistance or relief program.
- Fannie Mae’s form of forbearance agreement does not address the fact that proceeds from the above noted sources may not be sufficient to bring the loan current.
- Based on this language, if a borrower obtained funds from the Paycheck Protection Program (PPP) under the Cares Act, they may be required to use those proceeds to bring the mortgage current before using those funds for payroll costs. Using such PPP funds for the mortgage could impact the portion of the PPP loan that is forgiven since the PPP loan only allows for 25% of the PPP funds to be used for non-payroll costs.
- The terms noted above under the Renter Protections During Forbearance Period section.
- Until the borrower is current on the loan, all revenue or income generated by the Property, will be used solely for allowable normal and customary operating expenses and approved capital expenditures. Furthermore, borrower agrees that no distributions to partners, members and affiliates will be allowed (except for certain management fees).
SEC. 4024. TEMPORARY MORATORIUM ON EVICTION FILINGS
Section 4024, separately from Section 4023, provides for a temporary moratorium on eviction filings for 120 days, beginning on March 27, 2020 through July 24, 2020 with an additional 30 days’ notice. Under Section 4024, landlords are prohibited to:
- File any action to recover possession of the covered dwelling on account non-payment of rent or other fees or charges; or
- Charge tenant any fees related to non-payment of rent.
The primary difference between the tenant/renter protections provided under Section 4023 and 4024 is the timing of the eviction restrictions. Section 4023 runs through the applicable forbearance period and Section 4024 runs 120 days.
Additionally, states and local governments have also initiated suspensions of all residential evictions in their states/jurisdictions. The National Housing Law Project has published a state-by-state list of eviction/foreclosure moratoria.
Sections 4023 and 4024 of the Cares Act provide a short-term relief to both multifamily borrowers with federally backed mortgages and tenants residing in such affordable housing projects. Please contact your BRC advisor if you have any questions or need further assistance.
Jamie L. Parsons Principal, CPA
Jamie is a Principal in our Firm’s assurance area with over 16 years of experience in public accounting. She works primarily with non-profit organizations and clients involved in the affordable housing industry, including tax credit properties, U.S. Department of Housing and Urban Development and U.S. Department of Agriculture Rural Development sites. She has experience […]