Anticipating a wave of pandemic-fueled foreclosures, the Consumer Financial Protection Bureau has issued new rules to ensure borrowers have time to explore their options, including loan modifications and selling their homes.
The rules cover loans on an owner's primary home and will go into effect on Aug. 31, a month after a federal moratorium on foreclosures is set to expire.
As of May, more than 3%, or approximately 1.6 million borrowers, were behind on their mortgages by at least four months, Black Knight, a mortgage data and technology company, told USA TODAY.
Four months is the point at which a mortgage servicer can start a foreclosure.
About 2 million people are currently under forbearance plans, with at least 900,000 homeowners projected to exit forbearance between now and the end of the year, according to CFPB.
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“An unchecked wave of foreclosures would ... risk destabilizing the housing market for all consumers," said Dave Uejio, the CFPB’s acting director. "We are giving homeowners the time and opportunity to make informed decisions about the best course of action for them and their families.”
The new rules include safeguards like requiring mortgage servicers to increase their outreach to borrowers before beginning a foreclosure. They also include informing them of their repayment and other options, and ensuring that loan modifications don’t increase borrowers’ payments.
Borrowers will have at least three options to bring their mortgages current and avoid foreclosure.
Resume regular mortgage payments. Servicers can move a borrower’s missed payments to the end of the mortgage, commonly called “deferral.”
Lower their monthly mortgage payments. Loan modifications can change the interest rate, principal balance, or length of the mortgage.
Sell their homes. For homeowners with sufficient equity, a sale may be a possibility. However, long-term forbearance may have significantly eroded borrowers’ equity, and home prices may dip if the market is inundated with home sales.
Peter Mills, vice president of residential policy for the Mortgage Brokers Association, applauded the bureau’s new rules, adding that "a further delay of the process is not in the interest of the borrower, the lender, or the community."
Under the CFPB’s rule, foreclosures can start if the borrower:
Has abandoned the property;
Was more than 120 days behind on their mortgage before March 1, 2020;
Is more than 120 days behind on their mortgage payments and has not responded to specific required outreach from the mortgage servicer for 90 days; or
Has been evaluated for all options other than foreclosure and there are no available options to avoid foreclosure.
Swapna Venugopal Ramaswamy is the housing and economy reporter for USA TODAY. Follow her on Twitter @SwapnaVenugopal
This article originally appeared on USA TODAY: Foreclosures: Mortage holders now have options to avoid losing homes