The Consumer Financial Protection Bureau proposed a rule Monday to prevent a wave of foreclosures this fall, when certain Covid-era protections for homeowners will expire.
The proposal, which would need final approval, generally prohibits mortgage servicers from initiating foreclosure proceedings against delinquent borrowers until after December 31, 2021.
The rule would apply to all mortgages, both federal and private, on a primary residence, CFPB officials said Monday.
The Covid pandemic has led to a marked increase in housing insecurity amid massive unemployment and loss of income, emphasizing homeowners’ ability to pay monthly mortgages.
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The federal government allowed borrowers to suspend payments as part of forbearance programs and imposed a moratorium on foreclosures. Forbearance does not forgive late mortgage payments; it just postpones them.
Loans placed in the forbearance program at the beginning of the pandemic will reach the end of their forbearance period in September or October, the CFPB said.
Up to 1.7 million borrowers are expected to exit the forbearance programs at that time and be at risk of foreclosure, a figure that dwarfs anything mortgage servicers have seen, the CFPB’s acting director said Monday, Dave Uejio.
Such a cliff of foreclosures would disproportionately affect black, Hispanic, Native American, rural and low-income homeowners, the CFPB said.
“The CFPB is concerned about a potential cliff in the future,” said Patricia McCoy, a professor at Boston College Law School and former CFPB assistant director for mortgage markets.
“At some point, the cliff will occur,” he added. “The forbearance will disappear, the foreclosure moratorium will disappear and 1.7 million borrowers are at immediate risk of foreclosure.”
The consumer agency proposed establishing a “temporary emergency pre-foreclosure Covid-19 review period” during which mortgage servicers cannot make an initial notice of foreclosure. This period would last until 2021.
This is in addition to existing protections that do not allow such notification or submission until the borrower’s loan obligation is more than 120 days past due. Many homeowners in forbearance are more than 120 days late, said Diane Thompson, senior adviser to the CFPB’s acting director.
The proposal would give servicers a three-month reprieve to complete a “loss mitigation” review for borrowers, McCoy said.
In such a review, mortgage servicers assess the financial condition of borrowers and whether it makes sense to restructure their mortgage for more affordable payments or ultimately foreclosure.
Modifying a mortgage might make sense if a defaulting homeowner who had lost his job has regained a job with a lower pay scale and can pay lower monthly mortgage payments, McCoy said.
That may increasingly apply to more homeowners if the job market continues to improve in the coming months, he said.
Loss mitigation assessments take time, and managers 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 before being expected to come out of forbearance all at once,” he said. “This could put enormous pressure on the manager’s ability.”
The proposal would also grant some concessions to administrators. It would give servicers the flexibility to offer certain simplified loan modification options with less paperwork from borrowers if the restructuring meets certain conditions.
The CFPB is also “seriously considering” and seeking comment on certain exemptions from the proposed pre-foreclosure review period if a servicer has completed a loss mitigation review and the borrower is not eligible for any non-foreclosure options.
You are also considering the exemption if the servicer has made certain efforts to communicate with the borrower and the borrower has not responded to the approach.
Public comments on the rule must be submitted by May 10.