Foreclosure moratoriums could be extended

Foreclosures may be banned until 2022 if a new rule from the Consumer Financial Protection Bureau goes through. 

The rule — which the CFPB says would benefit both underwater homeowners and mortgage servicers — would prohibit servicers from initiating the foreclosure process until after December 31 of this year.

It would also allow for streamlined loan modifications to help post-forbearance homeowners get back on their feet.

For now, the rule is still in the works, so things could change. Here’s what you need to know about the proposal in its current state — and what it might mean for borrowers.

What the new foreclosure rule means for homeowners

The CFPB’s proposed rule would impose a number of new protections for homeowners, the first being what it calls “early intervention live contact.”

This means mortgage loan servicers need to make ‘live contact’ (a phone call, for example) and provide borrowers with loss mitigation options before their forbearance period ends. The goal is to help homeowners exit forbearance smoothly and resume mortgage payments in a way they can afford.

The rule would also allow servicers to offer loan modifications — including term extensions and payment deferrals — with less documentation for borrowers exiting forbearance.

There would also be certain situations when servicers could not charge fees, interest, or even past late fees during these modifications.

Finally — and this is the big one — the rule would institute a “temporary COVID-19 pre-foreclosure review period,” during which servicers could not initiate foreclosure notices or filings. It would last through December 31, 2021, starting from the rule’s effective date.

That means servicers wouldn’t be able to start foreclosure proceedings against a homeowner until at least January 1, 2022.

Who would the foreclosure rule apply to? 

CFPB’s proposal aims to help homeowners who have been financially impacted by the COVID-19 pandemic — primarily those who have lost their jobs or seen their income drastically cut during this time.

As of February, about 3 million homeowners were behind on their mortgages, and 2.1 million were on a forbearance plan due to COVID-related hardships. Data show that by September, about 1.7 million of these borrowers will exit forbearance, many a full year or more behind on their loans.

For those facing financial hardship, getting current on a home loan may be next to impossible.

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.

“Every one of the nearly 3 million borrowers behind on their mortgages should have a chance to explore ways to resume making payments and avoid foreclosure,” the CFPB’s announcement states.

Under current guidelines, the CFPB’s foreclosure ban would apply to all borrowers — including those with private loans, which account for about 30% of the market.

Previously, actions by the CFPB and Federal Housing Finance Agency only applied to borrowers with federally-guaranteed loans (FHA, VA, or USDA) and conforming mortgages owned by Fannie Mae and Freddie Mac.

One quick note here: Though loan type won’t 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 property payments? They won’t qualify.

Will the CFPB foreclosure moratorium pass?

To be clear: The new rule hasn’t passed yet. The CFPB is still requesting comments on the proposal through May 11. 

But Melissa Cohn, an executive mortgage banker at William Raveis Mortgage, says “there is a very good chance” that it — or at least something like it — does go through.

“We have seen the extension of forbearance several times now, and it is clearly prudent that an exit program gets created to keep as many people as possible in their homes,” Cohn says.

“A flood of foreclosures is the last thing anyone wants to see,” she continues. “Foreclosures cause real estate values to drop and cause harm to the homeowners as well. A massive wave of foreclosures would be detrimental to our economy and create a disruption that could bring a halt to the current recovery. We simply can’t afford to let this happen.”

According to the CFPB, the proposed effective date of the new rule would be August 31, 2021. This isn’t set in stone, though, and the agency is currently seeking public input on its timeline — as well as the proposal itself.

When would foreclosures resume? 

There’s no word on how quickly foreclosures would pick back up after the December 31 deadline passes.

In fact, the CFPB says there may even be situations when it will “permit earlier foreclosures” if the servicer has made certain efforts to work with the borrower or has been unable to reach them.

Another consideration is the lengthy processing periods that come with foreclosures, which — in some states — require full-on court proceedings.

According to RealtyTrac, it can take anywhere from a month to over a year to process foreclosures (445 days in New York!), so depending on where borrowers live, there may still be a chance to get current or modify their loans well after the December 31 marker.

What are the options for homeowners currently in forbearance? 

The CFPB’s foreclosure ban isn’t quite in place just yet. So if you’re currently in forbearance, you’ll want to have a plan for exiting — particularly if payments are still a challenge.

Your first option is to request a forbearance extension, which would give you another six months’ break on mortgage payments.

If you’re not eligible for an extension or have already used yours, you can:

• Repay your overdue payments in full via a one-time payment (this is NOT required in most cases)
• Arrange a payment plan with your servicer and spread your overdue payments across a three- to 12-month period
• Add the payments to the end of your loan term
• Defer the payments until your home is sold or refinanced
• Modify your loan and change its terms, rate, or other details to make the payment more manageable

Here’s a full breakdown of options if you’re nearing the end of your forbearance period and still need help.