Hurricanes Harvey and Irma recently caused widespread devastation and flooding throughout the southeastern United States, temporarily displacing millions of people and causing hundreds of billions of dollars in property damage. As the waters recede along the gulf coast and the full extent of the damage continues to be exposed, Fannie Mae and Freddie Mac have expressed their solidarity with those affected by implementing relief programs for their borrowers.
Fannie Mae and Freddie Mac Hurricane Disaster Relief Programs
In the aftermath of the hurricanes, Fannie Mae and Freddie Mac enacted programs to grant temporary loan forbearances to borrowers affected by the storms. Any Fannie Mae or Freddie Mac borrower with a loan secured by real property located within the Federal Emergency Management Agency’s “Designated Counties” for these hurricane disasters (a list of these counties can be found at http://www.fema.gov/disasters) may be eligible for temporary relief, however, relief is generally contingent on a loan being otherwise in good standing (i.e., not already in special servicing). 1 If forbearance is granted, monthly installments of interest, principal and impounds will be postponed and the lender will not exercise rights and remedies in connection with any missed payments due to the hurricanes during the forbearance period.
Overview of Fannie Mae Program
Overview of Freddie Mac Program
Preparing for the Casualty Crisis
One of the primary goals of the above described forbearance relief is to allow adequate time for hundreds upon hundreds3 of commercial borrowers to determine the extent to which the hurricanes affected their property and operations. For properties that suffered storm damage, servicers may find themselves tangled in a complex web of insurance coverage issues, including disputes among insurers as to who is required to pay for what. For this reason, servicers should consider taking inventory of the existing insurance on a property as soon as a casualty is suspected in order to double check, for example, that flood insurance was indeed required at origination and exists on the property. Once the servicer understands what the potential payment sources are, it will then need to recognize what each policy covers and does not cover (for example, flood insurance should not be assumed to cover all storm damage or losses resulting therefrom), as well as its rights and responsibilities under the loan documents respect to the making and settling of claims, the escrow of funds, disbursements for restoration, and application of insurance proceeds to the loan.
The quick reactions by Freddie Mac and Fannie Mae to address these catastrophic events will provide short term relief for the affected borrowers and time to assess the extent of the damage and resources available to restore the properties. Unfortunately, the recovery for many borrowers will extend beyond the forbearance period and involve many complex issues.
We have the experience and expertise to assist in these efforts. Aside from our commitment to working diligently and efficiently to process forbearance agreements, we aim to help our clients simplify complex legal issues and cut through the red tape so that they can be responsive to borrower requests during this challenging and uncertain time for so many. For more information about this alert, please contact Robin Dubas in our Dallas office (email@example.com, 214-721-8030), Paul Donohue in our Charlotte office (firstname.lastname@example.org, 704-749-8949), Tia Cottey in our Phoenix office (email@example.com, 602-364-7012), or any other financial services connection that you have at Bryan Cave.
1. It is important for servicers to be mindful that neither agency appears to have waived the servicing standard or applicable guide requirements (except to the extent expressly noted in official communications from the agencies, such as Fannie Mae’s consent within Letter 17-10 to short term leases and the expansion of time to complete casualty loss assessments) in connection with the implementation of their hurricane relief programs. Servicers should continue to consider the servicing standard and guide requirements when evaluating borrower requests for hurricane relief and consult counsel if there appears to be tension between the goals of the disaster relief program and the servicer’s obligations with respect to the management of a loan.
2. Notwithstanding Fannie Mae’s consent to short term leases, before approving a request for a short term lease a servicer should evaluate whether such short term lease would violate any applicable laws, such as anti-gouging laws, or regulations. Additionally, tax consequences should be considered for properties eligible for tax credits or that have been financed through municipal bonds.
3. Given the magnitude of the natural disasters, the number of affected borrowers continues to be evaluated, and could change based on expansion of the FEMA disaster areas, however, consider that Freddie Mac alone has thus far identified 420 commercial mortgage loans potentially impacted by Hurricane Harvey (http://www.freddiemac.com/multifamily/pdf/k_deal_potential_exposure.pdf, last retrieved 9/13/17).