Seeking to avoid a wave of foreclosures, the Consumer Financial Protection Bureau said Monday that it’s proposing a new rule to give borrowers additional time and options when mortgage forbearance periods end.
Nearly 1.7 million borrowers are expected to exit forbearance programs in September and the following months — and many of those homeowners have fallen behind on their mortgage payments by a year or longer. In normal times, lenders can begin foreclosure actions against borrowers who haven’t paid for 120 days.
The mortgage relief enacted last year in response to the coronavirus pandemic was generous, but out-of-work borrowers remain in the danger zone. “As soon as they exit forbearance, they could be placed in foreclosure immediately,” Diane Thompson, a senior advisor to the CFPB, told reporters on a conference call today.
What the new relief would do
If the CFPB’s proposal wins approval, the new rule would:
- 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 Dec. 31, 2021. The CFPB is considering whether to allow earlier foreclosures if the servicer has taken certain steps to evaluate the borrower for loss mitigation or made efforts to contact an unreachable borrower.
- Give servicers flexibility: The proposed rule would let servicers — the companies that collect monthly mortgage payments — offer certain streamlined loan modification options to borrowers even if they haven’t filed complete paperwork. Usually servicers review a borrower’s modification options at one time, which can mean borrowers have to submit more documents before a servicer can make a decision. Allowing this flexibility could let servicers get borrowers into affordable mortgage payments faster, with less paperwork for both servicers and borrowers, the CFPB said.
- Keep borrowers informed of their options: The CFPB proposes temporary changes to some communications that servicers are required to make with borrowers.
The new rule would apply to all types of mortgages, not just those backed by Fannie Mae and Freddie Mac, Thompson said. The relief applies only to loans secured by a borrower’s primary residence, not to investment properties 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 lower their payments, Thompson said.
Foreclosure volumes have fallen to record lows during the pandemic, and housing economists say soaring home values will help many borrowers escape foreclosure. However, Thompson said it’s important that homeowners have some breathing room so they’re not forced into “panic selling.”
“Even assuming people sell their homes to get out from under the threat of foreclosure, it’s really important to make sure they have time to sell,” Thompson said.
In 2020, Congress and then-President Trump signed off on mortgage relief that let borrowers stop paying their home loans with no penalties. The missed payments are tacked on to the end of loans.