Federal officials on Monday finalized a rule designed to slow a wave of pandemic-related foreclosures they feared by making it easier for lenders to change borrowers’ credit terms and by adding additional hurdles before lenders can seize homes.
The Consumer Financial Protection Bureau said roughly 3 percent of residential real estate borrowers are now at least four months in arrears – the point at which most foreclosures are allowed to begin.
“We have never seen so many borrowers so far behind on their mortgages before,” said Dave Uejio, the bureau’s assistant director.
Federal evictions and foreclosures have kept most defaulting homeowners in place since last March, but those protections will end on July 31. Under the new regulation of the Consumer Center, which will come into force on August 31st and will be extended until the end of the year, mortgage servicers will generally be prevented from initiating foreclosure unless they have followed tightened rules.
In most cases, lenders are only allowed to foreclose a home if it is abandoned, if the borrower has not responded to messages for at least 90 days, or if the borrower has been formally screened for all available “loss mitigation options” (such as a loan modification) and are not sustainable.
Servicers are also allowed to perform foreclosures on borrowers who were 120 days or more in arrears prior to March 1, 2020.
The new rule also allows mortgage servants to more easily offer some loan modifications as long as the changes do not increase a borrower’s monthly payments or extend the loan term by more than 40 years beyond the modification date.
The rule is significantly softer than a proposal by the consumer association in April, which would have banned most foreclosure requests for the rest of the year. Mr. Uejio described the agency’s revised approach as one that would encourage a “measured return” to foreclosures.
Pete Mills, Senior Vice President of Residential Policy for the Mortgage Bankers Association, said the agency’s rule was generally reasonable and included the changes the industry was seeking, such as the exception to allow foreclosures on abandoned properties.
“In many cases, service providers go well beyond the minimum requirements in the rules to reach borrowers,” said Mills.
There will be a one-month gap between the end of the federal moratorium and the date on which the new consumer association regulation comes into effect, but lenders must continue to use good faith efforts to take on borrowers and consider alternatives before proceeding with a continue foreclosure, office officials said when called with reporters.
Diane Thompson, a senior advisor to the office, said the agency’s goal is to prevent “avoidable” foreclosures and give people time to reconsider their decisions, including resuming payments, changing their loan, or selling theirs House.
For those who have not made payments since the pandemic broke out, it is “important to understand that you need to develop a plan for how to approach this in the not too distant future,” Ms. Thompson said. “People have to weigh their options.”