Foreclosure moratoriums could be extended
Foreclosures can be banned until 2022 when a new Consumer Financial Protection Bureau rule goes into effect.
The rule – which the CFPB said would benefit both underwater homeowners and mortgage servicers – would prohibit service providers from starting the foreclosure process until after December 31 of this year.
It would also allow for streamlined loan modifications to help homeowners get back on their feet after the indulgence.
Currently the rule is still in the works so things may change. Here's what you need to know about the current state of the proposal – and what it could mean for borrowers.
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What the new foreclosure rule means for homeowners
The rule proposed by the CFPB would impose a number of new safeguards on homeowners, the first of which is what they refer to as "live contact for early intervention."
This means that mortgage loan service providers must make “live contact” (e.g., a phone call) and provide borrowers with opportunities to mitigate damage before their grace period ends. The goal is to help homeowners exit the forbearance smoothly and resume mortgage payments as they can afford.
The rule would also allow service providers to offer loan modifications – including term extensions and deferred payments – with fewer documentation for borrowers to step out of forbearance.
There would also be certain situations where service technicians would not be able to charge fees, interest, or even late fees during these changes.
Finally – and this is the big one – the rule would introduce a "temporary COVID-19 pre-foreclosure review period" during which servicers would not be able to initiate foreclosure notices or filings. It would last until December 31, 2021 from the effective date of the rule.
This means that servicers cannot initiate foreclosure proceedings against a homeowner until January 1, 2022.
Who would the foreclosure rule apply to?
CFPB's proposal aims to help homeowners who are financially affected by the COVID-19 pandemic – especially those who have lost their jobs or drastically cut their incomes during this time.
As of February, about 3 million homeowners were behind on their mortgages, and 2.1 million had a forbearance plan due to COVID-related difficulties. Data shows that by September, about 1.7 million of these borrowers will be exiting indulgence, many years or more behind their loans.
For those facing financial difficulties, it can be next to impossible to get a home loan updated.
Borrowers who are still employed may qualify for a loan modification, but those who have lost their sources of income may need other options.
Under current guidelines, the CFPB's new rule would apply to all borrowers – including those with private loans.
"Each of the nearly 3 million borrowers who are in arrears on their mortgages should be able to find ways to resume payments and avoid foreclosure," the CFPB's announcement said.
Under current guidelines, the CFPB's foreclosure prohibition would apply to all borrowers – including those with private loans, which make up around 30% of the market.
Previously, the measures taken by the CFPB and the Federal Housing Finance Agency only applied to borrowers with government-guaranteed loans (FHA, VA, or USDA) and compliant mortgages from Fannie Mae and Freddie Mac.
A quick note here: Although the type of loan does not matter under the CFPB's foreclosure rule, The mortgage must be secured by the borrower's primary residence. So borrowers who are behind on their second home or vacation home payments? You won't qualify.
Will the CFPB foreclosure moratorium be passed?
To be clear, the new rule has not yet been adopted. The CFPB is still asking for comments on the proposal until May 11th.
But Melissa Cohn, a senior mortgage lender at William Raveis Mortgage, says "there's a very good chance" that it – or at least something – will pass.
"We have seen the forbearance extension several times, and it is clearly advisable to put in place an exit program to keep as many people in their homes as possible," says Cohn.
"A spate of foreclosures is the last thing anyone wants to see," she continues. “Foreclosures cause property values to fall and also cause damage to homeowners. A massive wave of foreclosures would adversely affect our economy and cause a disruption that could halt the current recovery. We just can't afford to let this happen. "
According to the CFPB, the proposed date for the new rule to take effect would be August 31, 2021. However, that is not set in stone and the agency is currently seeking public input on its schedule – as is the proposal itself.
When would foreclosures resume?
There's no word on how quickly foreclosures would pick up again after the December 31st deadline.
In fact, according to the CFPB, there are even situations where "previous foreclosures are allowed" when the servicer has made certain efforts to work with the borrower or has been unable to achieve them.
Another consideration is the long turnaround times associated with foreclosures, which in some states require extensive legal proceedings.
According to RealtyTrac, foreclosures can take anywhere from a month to over a year (445 days in New York!). Depending on where the borrowers live, there may still be an opportunity to keep their loans updated or to change December 31st markers.
What options do homeowners currently have in leniency?
The CFPB's foreclosure prohibition is not yet fully in force. If you are currently in forbearance, you want to have a plan to exit – especially if payments are still challenging.
Your first option is to apply for an Forbearance Extension, which will give you another six-month break in mortgage payments.
If you are not eligible for an extension or have already used yours, you can:
Pay back your overdue payments in full with a one-time payment (this is NOT required in most cases). Agree on a payment plan with your servicer and spread your overdue payments over a period of three to twelve months. Add Payments Until Your Loan Ending Period Postpone Payments Until Your Home Is Sold or Refinanced. Modify your loan and change the terms, interest rate, or other details to make the payment easier to understand
Here is a full breakdown of options if you are nearing the end of your indulgence and still need help.
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