Consumer protection group proposes rule to prevent foreclosures until 2022
The Consumer Financial Protection Bureau proposed a rule on Monday to prevent a wave of foreclosures this fall, when some Covid-era protections for homeowners are about to expire.
The proposal, which would require final approval, typically bars mortgage managers from initiating foreclosure proceedings against delinquent borrowers before December 31, 2021.
The rule would apply to all mortgages, both federal and private, on a primary residence, CFPB officials said on Monday.
The Covid pandemic has led to a sharp increase in housing insecurity amid mass unemployment and loss of income, straining the ability of homeowners to pay monthly mortgages.
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The federal government let borrowers withhold payments under forbearance programs and imposed a moratorium on foreclosures. Tolerance does not forgive missed mortgage payments; it just postpones them.
Loans placed in a forbearance program at the start of the pandemic will reach the end of their forbearance period in September or October, the CFPB said.
1.7 million borrowers are expected to exit forbearance programs around this time and face foreclosure risk – a figure that overshadows anything mortgage managers have seen, the director said on Monday. CFPB Acting Dave Uejio.
Such a foreclosure cliff would have a disproportionate impact on black, Hispanic, Native American, rural and low-income homeowners, the CFPB said.
“The CFPB is concerned about a possible cliff face in the future,” said Patricia McCoy, professor at Boston College Law School and former CFPB deputy director for mortgage markets.
“At some point the cliff will happen,” she added. “Forbearance will end, the foreclosure moratorium will end and 1.7 million borrowers are at immediate risk of foreclosure.”
The consumer protection agency has proposed establishing an “emergency interim review period before Covid-19 foreclosure” during which mortgage managers cannot give a first notice of foreclosure. This period would last until 2021.
This is in addition to existing protections that prohibit such a notice or deposit until a borrower’s loan obligation is more than 120 days past due. Many forbearance homeowners are more than 120 days late, said Diane Thompson, senior advisor to CFPB’s interim director.
The proposal would give managers three months of leeway to complete a “loss mitigation” review for borrowers, McCoy said.
In such a review, mortgage managers assess the financial situation of borrowers and whether it makes sense to restructure their mortgage for more affordable payments or, ultimately, to foreclose on it.
Changing a mortgage might make sense if a delinquent homeowner who lost their job has since found a job at a lower pay scale and can afford monthly mortgage payments at a lower price, McCoy said.
This could increasingly apply to more homeowners if the job market continues to improve in the coming months, she said.
Loss mitigation assessments take time – and duty officers might not be able to respond adequately without the proposed three-month review period, Thompson said.
“I don’t think anyone has ever seen so many forborne mortgages at one time that should end the tolerance at the same time,” she said. “This could put enormous pressure on the capacity of the services.”
The proposal would also give some concessions to service agents. This would give managers the flexibility to offer some streamlined loan modification options with less paperwork on the borrowers’ part if the restructuring meets certain conditions.
The CFPB is also “seriously considering” and also seeking comments on certain exemptions from the proposed pre-foreclosure review period if a manager has completed a loss mitigation review and the borrower is not eligible for any opt-out. -foreclosure.
It is also considering exemption if the manager has made some effort to contact the borrower and the borrower has not responded to the outreach.
Public comments on the rule are expected before May 10.