The Consumer Financial Protection Bureau proposed a rule on Monday to prevent a wave of foreclosures this fall as certain Covid-era homeowner protections expire.
The proposal, which requires final approval, generally prohibits mortgage servants from starting foreclosure proceedings against criminal borrowers until after December 31, 2021.
The rule would apply to all mortgages, both federal and private primary residence mortgages, CFPB officials said Monday.
The Covid pandemic has led to a sharp rise in housing insecurity due to mass unemployment and loss of income, and has underscored homeowners’ ability to pay monthly mortgages.
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The federal government suspended borrowers’ forbearance payments and imposed a moratorium on foreclosures. Forbearance does not forgive missed mortgage payments; it just shifts them.
Loans included in an forbearance program at the start of the pandemic will reach the end of their leniency period in September or October, the CFPB said.
Up to 1.7 million borrowers are expected to step out of leniency programs around this time and face foreclosure – a number that dwarfs anything mortgage service providers have seen, Dave Uejio, acting director of the CFPB, said Monday.
Such a foreclosure cliff would disproportionately affect Black, Spanish, Native American, rural, and low-income homeowners, the CFPB said.
“The CFPB is concerned about a future cliff in the future,” said Patricia McCoy, professor at Boston College Law School and former CFPB deputy director on mortgage markets.
“Eventually the cliff will pass,” she added. “Forbearance will go away, the foreclosure moratorium will go away, and 1.7 million borrowers are at immediate risk of foreclosure.”
The consumer agency suggested setting up a “temporary Covid-19 advance foreclosure review period” that prevents mortgage servicers from pre-reporting foreclosures. This period would last until 2021.
This is on top of the existing safeguards that prohibit such notification or filing until a borrower’s loan commitment is more than 120 days in default. Many forbearance homeowners are more than 120 days behind schedule, said Diane Thompson, senior advisor to the acting director at the CFPB.
I don’t think anyone has ever before seen so many forbearance mortgages that are expected to get out of indulgence all at once.
Senior Advisor to the Acting CFPB Director
The proposal would give servicers three months to breathe to complete a “harm mitigation” review for borrowers, McCoy said.
In such a review, mortgage service providers assess the financial situation of borrowers and whether it makes sense to restructure or ultimately close their mortgage for cheaper payments.
Modifying a mortgage might make sense if a criminal homeowner who lost his job has since regained employment at a lower wage level and could afford monthly mortgage payments at a lower price, McCoy said.
This could increasingly apply to more homeowners as the job market continues to improve in the coming months, she said.
Assessing damage mitigation takes time – and service technicians may 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 Forbearance mortgages that are expected to end all at once,” she said. “This could put an enormous strain on the capacity of the servicers.”
The proposal would also make some concessions to service providers. This would give the servicers the flexibility to offer certain optimized options for modifying loans with less paperwork from the borrowers when the restructuring meets certain conditions.
The CFPB is also “seriously considering” and asking for an opinion on certain exceptions to the proposed foreclosure review period when a servicer has completed a mitigation review and the borrower is not eligible for a non-foreclosure option.
The exemption is also considered when the servicer made certain efforts to contact the borrower and the borrower did not respond to the contact.
Public comments on the rule are due by May 10th.