The Consumer Financial Protection Bureau proposed a rule Monday to prevent a wave of foreclosures this fall when certain Covid protections for homeowners are expected to expire. The proposal, which would need final approval, generally prohibits mortgage servicers from initiating foreclosure proceedings against delinquent borrowers until after Dec. 31, 2021. The CFPB rule would apply to all mortgages, both federal and private, in a principal residence, CFPB officials said Monday. The Covid Pandemic has led to a strong increase in housing insecurity amid mass unemployment and income loss, which means homeowners' ability to pay off their mortgages monthly. More from Personal Finance: New batch of$ 1,400 stimulus checks includes `` payments and `` -ups The pandemic has upended personal finance education in schools.
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The federal government allowed default payments as part of foreclosure programs and placed a moratorium on foreclosures.
Forbearance defers your mortgage payments only. It does n't forgive them. The loans placed early in the pandemic in forbearance program will reach the end of their forbearance period in September or October, the CFPB said. As many as 1.7 million borrowers are expected to exit foreclosure programs around that time and be at risk of foreclosure- a figure that dwarfs what mortgage servicers have seen, said CFPB Acting Director Dave Uejio Monday. Such a foreclosure cliff would disproportionately impact the Black, Hispanic, Native American, rural and low-income homeowners, the CFPB said.
The CFPB is concerned about a future cliff in the future, said Patricia McCoy, a professor at Boston College Law School and the former Assistant Director for Mortgage Markets for the CFPB. The cliff will happen, she added; foreclosure moratorium will go away, and 1.7 million borrowers are at the instant risk of foreclosure. The Consumer Agency proposed establishing a temporary Covid 19 preliminary pre-foreclosure review period during which mortgage servicers ca n't make an initial notice of foreclosure. This period would last until 2021, but this comes on top of existing protections that disallow such a notification or filing until the borrower's loan obligation is more than 120 days delinquent. Many homeowners are in forbearance behind more than 120 days, said Diane Thompson, acting advisor to the senior director at the CFPB. The proposal would give servicers three months of breathing room to complete a loss mitigation review for borrowers, McCoy said. Mortgage servicers review borrowers' financial situation and whether it makes sense to restructure your mortgage for more affordable payments or ultimately foreclose.
Modifying a mortgage could make sense if a delinquent homeowner who had lost their job has since regained employment at a lower pay scale and could afford monthly mortgage payments at a lower price point, said McCoy. That could also apply to more homeowners if the job market continues to improve in the coming months, she said. Loss mitigation evaluations take time- and servicers may not be able to respond adequately without the proposed three-month review period, Thompson said. I do n't think anyone has ever seen that many mortgages in forbearance at one time that are expected to leave forbearance all at the same time, she said. This could put enormous strain on servicer capacity.
The proposal would also offer some concessions to servicers. It would give servicers the flexibility to offer certain streamlined loan modification options with less paperwork from borrowers if 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. It is also contemplating the exemption if the servicer has made certain efforts to contact the borrower and the borrower has not responded to the outreach. Public comments on the rules are due by May 10.