The impending termination of government aid for struggling homeowners is expected to spark a flood of foreclosures as early as next month, but the mortgage industry hopes a recent Consumer Financial Protection Bureau rule will help limit the damage.
Federally sponsored forbearance plans begin expiring in September after a temporary foreclosure moratorium ended July 31. Many analysts believe foreclosures will soon be inevitable for hundreds of thousands of borrowers who were delinquent as soon as the pandemic began last year.
But a CFPB rule taking effect Aug. 31 is designed to help servicers handle the flood of defaults and modification requests. A key provision enables lenders to process quick foreclosures for loans beyond repair, so they can focus on working with other borrowers and thereby mitigate cumulative foreclosures from COVID-19.
“The servicers have been staffing up, cross-training people and are ready to handle borrowers as they come out of forbearance,” said Rick Sharga, an executive vice president at RealtyTrac.
The CFPB rule was issued in June and expires in October 2022. It creates pandemic safeguards that a servicer must meet before filing a foreclosure, allows streamlined modification options for borrowers affected by COVID-19, and requires servicers to erase delinquencies in certain cases when a borrowers accepts a modification.
But the CFPB is allowing some
"Where the CFPB rules come into play is that servicers now have certain additional requirements before they can execute a foreclosure, but they did offer several carve-outs and the biggest of those is if your loan was in foreclosure prior to the moratorium being declared, the servicer may immediately resume the foreclosure proceeding," Sharga said.
But it’s still an open question whether government efforts to reduce pandemic-related foreclosures will work.
“The CFPB’s servicing rules will prevent a large number of foreclosures,” said Nick Agnello, a partner at the law firm Burr & Forman in Fort Lauderdale. “It’s going to be a tall task to implement and it’s going to be a lot of work for the servicers but they are certainly doing their best to comply.”
The CFPB issued the rule to create a more orderly exit from forbearance plans with the goal of staggering foreclosure filings as much as possible into next year.
As the end of the moratorium approached last month, servicers already began filing initial documentation necessary to commence foreclosures that could be processed in August. Such filings
Roughly 1.7 million borrowers were in forbearance plans as of Aug. 1, according to the Mortgage Bankers Association. The CFPB is concerned that servicers could become overwhelmed because as many as 900,000 borrowers are expected to exit forbearance plans between September and the end of the year.
Industry experts are closely watching the breakdown of loans in forbearance to determine which borrowers are more likely to go into foreclosure or are more likely to sell their homes.
MBA data shows that loans in forbearance have gradually declined from last year's highs, but they still remain well above prepandemic lows.
The percentage of loans in forbearance remains the highest for mortgages held on bank portfolios or backed by private-label mortgage securities. That was 7.37% on Aug. 1, according to the MBA. Among loans backed by the Federal Housing Administration and other government agencies, 4.18% were in forbearance, followed by 3.63% for independent mortgage banks and 1.74% for loans backed by Fannie Mae and Freddie Mac.
The spread of the Delta variant and whether certain sectors of the economy rebound will also affect borrowers' ability to exit forbearance without going into foreclosure.
“The real risk is you have regional effects due to the strain of COVID,” said Pete Carroll, a public policy executive at CoreLogic and a former CFPB assistant director of mortgage markets.
But many experts think fears of a full-scale foreclosure crisis are overblown largely because of the dramatic turnaround in the housing market. Interest rates are at all-time lows, so many borrowers can refinance. Home prices have skyrocketed in the past year with fewer than 5% of homeowners underwater on their mortgage.
In addition, over 70% of homeowners have more than 20% equity in their homes and housing supply is in such demand that most borrowers should have little difficulty selling at a profit.
Still, foreclosures are about to ramp up for the 200,000 to 250,000 borrowers who are seriously delinquent and have not responded to any outreach, said Sharga.
The CFPB's rule allows servicers to immediately start the foreclosure process for borrowers who were already 120 days delinquent when the pandemic began in March 2020, and those who are 120 days delinquent and have not responded for 90 days to outreach from their servicer.
Under the Coronavirus Aid, Relief, and Economic Security Act passed by Congress last year, borrowers are still counted as seriously delinquent after they have been in a forbearance plan for 90 days even though they are not reported to the credit bureaus as delinquent.
One critical change under the CFPB's rule is that it permits servicers to offer a streamlined loan modification to a borrower even if the homeowner has not completed an application to restructure the loan. Unfinished applications were a major stumbling block for servicers trying to complete loan workouts in the last financial crisis.
In addition, even though the earliest forbearance plans from the pandemic end next month, borrowers still have until the end of September to enter new plans and those will last through September 2022.
But servicers are facing a much higher workload around the bend as the unprecedented level of government assistance responding to the pandemic begins to wind down. There are also state foreclosure timelines that make compliance tricky for servicers.
Sharga predicts there will be three separate foreclosure waves: in September of this year, early 2022 and mid-2022.
"I think servicers are staffed and ready to handle people as they come out of forbearance," said Sharga. "I think the combination of how successful the [forbearance] program is and the new CFPB rules will give distressed borrowers another six months to kind of work out whatever their situations might be and keep foreclosures down."
More than nine million borrowers have been in a forbearance plan at one point or another since the pandemic began, according to
Industry executives are most concerned about low-income borrowers with FHA loans that were struggling before the pandemic hit.
“You have the dynamic of people exiting forbearance and going into loss mitigation but they may re-default,” said Carroll. “So much will depend on how the sectors most devastated by COVID manage to come back.”
Servicers have far more tools to work with because the CFPB put in place minimum loss mitigation and outreach requirements after the last financial crisis. The CFPB has made a number of other changes to its temporary rule to give servicers more flexibility and struggling borrowers who can resume payments a shot at staying in their homes.
“The forbearance program has been the most successful government-industry partnerships ever in the mortgage industry,” Sharga said.
