Federal officials on Monday finalized a rule intended to slow down what they fear will be a looming wave of pandemic-related foreclosures by making it easier for lenders to modify borrowers’ loan terms and by adding additional hurdles before lenders can seize homes.
The Consumer Financial Protection Bureau said that around 3 percent of residential mortgage borrowers are now at least four months in arrears — the point at which most foreclosure processes are allowed to begin.
“We have never before seen this many borrowers so far behind on their mortgages,” Dave Uejio, the bureau’s acting director, said.
Federal moratoriums on evictions and foreclosures have kept most delinquent homeowners in place since last March, but those protections will end on July 31. Under the consumer bureau’s new rule, which takes effect on Aug. 31 and extends until the end of the year, mortgage servicers will generally be barred from initiating a foreclosure unless they have complied with heightened rules.
In most cases, lenders will only be allowed to foreclose on a home if it is abandoned, if the borrower has not responded to messages for at least 90 days, or if the borrower has been formally evaluated for all available “loss mitigation” options (such as a loan modification) and none are viable.
Servicers will also be allowed to proceed with foreclosures for borrowers who were already 120 or more days delinquent before March 1, 2020.
The new rule also allows mortgage servicers to more easily offer some loan modifications so long as the changes do not increase a borrower’s monthly payments or extend the loan’s term more than 40 years beyond the modification date.
The rule is significantly softer than a proposal the consumer bureau floated in April, which would have banned most foreclosure filings for the rest of the year. Mr. Uejio described the agency’s revised approach as one that would encourage “a measured return” to foreclosures.
Pete Mills, the senior vice president of residential policy for the Mortgage Bankers Association, said the agency’s rule was generally reasonable and incorporated changes the industry had sought, such as the exception allowing foreclosures on abandoned properties to proceed.
“In many cases, servicers are already going well beyond the minimum requirements in the rules to reach borrowers,” Mr. Mills said.
There will be a one-month gap between the end of the federal moratorium and the date when the consumer bureau’s new rule takes effect, but lenders will still be required to make a good-faith effort to contract borrowers and explore alternatives before proceeding with a foreclosure, bureau officials said on a call with reporters.
Diane Thompson, a senior adviser at the bureau, said the agency’s goal was to head off “preventable” foreclosures and to give people time to consider their choices, including resuming payments, modifying their loan or selling their home.
For those who haven’t been making payments since the pandemic took hold, it’s “important to understand that you’re going to need to figure out a plan for how to address that in the not-too-distant future,” Ms. Thompson said. “People need to be assessing their options.”
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