Federal regulator proposes foreclosure ban for distressed homeowners
Seeking to avoid a wave of foreclosures, the Consumer Financial Protection Bureau said Monday it was proposing a new rule to give borrowers more time and options when mortgage forbearance the periods end.
Nearly 1.7 million borrowers are expected to leave forbearance programs in September and beyond – and many of those homeowners are a year or more behind on their mortgage payments. Under normal circumstances, lenders can initiate foreclosure actions against borrowers who have not paid for 120 days.
Mortgage relief adopted last year in response to the coronavirus pandemic was generous, but jobless borrowers remain in the danger zone. “As soon as they come out of forbearance, they could be immediately placed into foreclosure,” Diane Thompson, CFPB senior advisor, told reporters on a conference call today.
What the new relief would do
If the CFPB proposal is approved, the new rule:
- Give borrowers time. The proposed rule would create a special pre-foreclosure review period that would generally prohibit mortgage companies from starting foreclosure until after December 31, 2021. Loss mitigation or efforts to contact an unreachable borrower.
- Give flexibility to repairers: The proposed rule would allow service providers – the companies that collect monthly mortgage payments – to offer certain simplified loan modification options to borrowers, even if they have not filed complete documents. Usually, repairers review a borrower’s modification options all at once, which may mean borrowers have to submit more documents before a repairman can make a decision. Allowing this flexibility could allow service providers to get borrowers to affordable mortgage payments faster, with less paperwork for service providers and borrowers, the CFPB said.
- Keep borrowers informed of their options: The CFPB is proposing temporary changes to certain communications that service agents are required to make with borrowers.
The new rule would apply to all types of mortgages, not just those guaranteed by Fannie Mae and Freddie Mac, Thompson said. The relief applies only to loans secured by a borrower’s primary residence, and not to investment property or second homes.
The CFPB wants to avoid a foreclosure crisis like the one that followed the Great Recession. In some cases, borrowers might be able to extend the terms of their loans to 40 years to reduce their payments, Thompson said.
Foreclosure volumes have fallen to record levels during the pandemic, and housing economists say the surge in home values will help many borrowers escape foreclosure. However, Thompson said it was important for homeowners to have a bit of a break so they didn’t have to “panic sell.”
“Even assuming people are selling their homes to get away from the threat of foreclosure, it’s really important to make sure they have time to sell,” Thompson said.
In 2020, Congress and President Trump signed mortgage relief that allows borrowers to stop paying their home loans without penalty. Missed payments are added at the end of the loans.