Today, just over two million homeowners are in COVID-19 hardship foreclosure forbearance. The Consumer Financial Protection Bureau (CFPB) recently stated that over 3% of all borrowers are now four months or more behind on their mortgages, which is the usual point when a foreclosure may be initiated. Not even during the worst of the 2009 financial crisis have so many borrowers been so far behind. In response, the CFPB issued a temporary rule under the Real Estate Settlement Procedures Act and Regulation X (RESPA), effective that offers opportunities for investors and servicers to avoid foreclosures and provide better outcomes for themselves and the communities they serve by allowing evaluations of loss mitigation options based on incomplete applications.
Moratoriums are lifting, but when?
When precisely foreclosures may resume remains uncertain, but the general consensus is “end of summer.” The Coronavirus Aid, Relief and Economic Security Act (CARES Act), Section 4022, allows borrowers with federally backed single-family mortgage loans (HUD/FHA, VA, USDA, Fannie Mae and Freddie Mac loans) to seek forbearance for up to 180 days, which “shall be extended for an additional period of up to 180 days at the request of the borrower.” Loans backed by HUD/FHA, USDA, or VA set the deadline for requesting an initial forbearance to Sept. 30, 2021.
Fannie Mae and Freddie Mac are extending the moratoriums on single-family foreclosures and real estate-owned evictions until July 31, 2021. These moratoriums are a moving mark, as they have been extended for one month, about one week before the prior moratorium ends. Thus, this July 31 deadline could potentially be revised.
Private loans are not subject to the federal moratoria but may be subject to state protections, such as in California.
Criteria for Foreclosure under the CFPB’s Temporary
Foreclosure Rule
Once moratoria lift, the CFPB’s newly issued foreclosure rule will apply from Aug. 31, 2021, through Dec. 31, 2021. The rule covers all primary residences subject to RESPA that are delinquent due to the pandemic, i.e., where “the borrower’s mortgage loan obligation became more than 120 days delinquent on or after March 1, 2020.” To protect investors, however, the rule carves out delinquent loans where the statute of limitations applicable to a foreclosure action expires before Jan. 1, 2022. Accordingly, once the moratoriums lift, initial foreclosure notices may issue for properties that were more than 120 days behind on their mortgage before March 1, 2020, or if the statute of limitations expires before Jan. 1, 2022.
For loans covered by the CFPB’s rule, foreclosures may begin if the borrower:
- Has abandoned the property;
- Is more than 120 days behind on their mortgage payments and has not responded to specifically required outreach from the mortgage servicer for 90 days; or
- Has been evaluated for all options after submitting a completed loss mitigation application and there are no available options to avoid foreclosure.
The CFPB’s Rule Adds Flexibility for Investors and Servicers
For the population that engages with their servicer, the rule “permits servicers to offer certain streamlined loan modification options made available to borrowers with COVID-19-related hardships based on the evaluation of an incomplete loss mitigation application.” If the borrower accepts an offer made pursuant to this new exception for incomplete applications, the rule temporarily relieves servicers of specific timing and notice obligations so they can more quickly move to a resolution.
Unlike 2009, our economy has a field of ready buyers waiting to acquire newly available properties. Prices for new and existing homes are at record levels, and increases are accelerating at the fastest clip in over 15 years. With teleworking on the rise, distressed homeowners are less tied to expensive markets.
Documentation Requirements for Short Sales and Deeds in Lieu
Unlike 2009, our economy has a field of ready buyers waiting to acquire newly available properties. Prices for new and existing homes are at record levels, and increases are accelerating at the fastest clip in over 15 years. With teleworking on the rise, distressed homeowners are less tied to expensive markets. In 2021, short sales and deeds in lieu of foreclosure could be an equitable solution for homeowners and investors alike.
To comply with the temporary rule when offering non-retention foreclosure relief options, the borrower must first indicate a preference not to retain the property. Second, the servicer must collect documents and information from the borrower about available home retention options until the servicer confirms that the borrower has an applicable hardship that qualifies for a non-retention solution under requirements established by the loan’s owner or assignee.
The CFPB’s foreclosure rule requires servicers to rely on investor guidelines when offering loss mitigation options, of which short sales and deeds in lieu are two. Particularly for recently purchased homes, hardship criteria for non-retention loss mitigation have centered on employer-mandated relocations. But now that workers can telework from less-expensive locations, mandatory employment transfers may be outdated criteria.
Accordingly, to take advantage of increased flexibility in determining optimal loss mitigation outcomes, including short sales and deeds in lieu of foreclosure, private investors with significant delinquency exposure who can manage short sales or owned real estate may wish to reexamine their home retention loss mitigation options to include voluntary relocation. Adjusting guidelines to allow more short sales and deeds in lieu may be a win-win for investors and homeowners alike.
