The Consumer Financial Protection Bureau proposed a rule on Monday to prevent a wave of foreclosures this fall, when certain Covid-era protections for homeowners are set to expire.
The proposal, which would require final approval, generally prohibits mortgage agents from initiating foreclosure proceedings against defaulting borrowers until after December 31, 2021.
The rule would apply to all mortgages, federal and private, in 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, emphasizing homeowners’ ability to pay monthly mortgages.
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The federal government allowed borrowers to suspend payments as part of indulgence programs and put a moratorium on foreclosures. Tolerance does not forgive missed mortgage payments; it just postpones them.
Loans placed in the tolerance program at the beginning of the pandemic will reach the end of the grace period in September or October, the CFPB said.
About 1.7 million borrowers are expected to abandon indulgence programs around that time and run the risk of foreclosure – a figure that exceeds everything mortgage agents have seen, said the CFPB acting director. , Dave Uejio, on Monday.
Such a foreclosure cliff would disproportionately affect blacks, Hispanics, Native Americans, rural and low-income landowners, the CFPB said.
“The CFPB is concerned about the prospect of a precipice in the future,” said Patricia McCoy, a professor at Boston College Law School and a former assistant director of the CFPB for mortgage markets.
“At some point, the precipice is going to happen,” he added. “Indulgence will go away, the foreclosure moratorium will go away and 1.7 million debtors are at immediate risk of foreclosure.”
The consumer agency has proposed establishing a “temporary Covid-19 pre-foreclosure emergency review period” during which mortgage agents are unable to make an initial foreclosure notice. This period would last until 2021.
This is in addition to the existing protections that do not allow such notification or filing until the borrower’s loan obligation is in default for more than 120 days. Many tolerant homeowners have been overdue for more than 120 days, said Diane Thompson, senior consultant to the interim director of the CFPB.
I don’t think anyone has ever seen so many indulgence mortgages at one time that they should get out of indulgence all at once.
Diane Thompson
senior advisor to the CFPB acting director
The proposal would give employees three months off to complete a “loss mitigation” review for borrowers, McCoy said.
In such a review, mortgage agents assess the financial situation of borrowers and whether it makes sense to restructure their mortgage for more affordable payments or, ultimately, to execute it.
Modifying a mortgage could make sense if a delinquent homeowner who has since lost his job has regained his job on a lower payment scale and could pay the monthly mortgage payment at a lower price, McCoy said.
This may increasingly apply to more homeowners if the job market continues to improve in the coming months, she said.
Loss mitigation assessments take time – and servicers 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 indulgence mortgages at one time that they should get out of indulgence at once,” she said. “This could put a huge strain on the servicer’s ability.”
The proposal would also give some concessions to the servers. This 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 option.
It is also considering exemption if the servicer has made some efforts to contact the borrower and the borrower has not responded to the disclosure.
Public comments on the rule should be made by 10 May.