Struggling Homeowners Will Get Extra Protections From the Government -- but Foreclosures Will Resume

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As forbearance plans come to an end, borrowers will get some protection from losing their homes.

Many homeowners found themselves in a precarious financial situation once the coronavirus pandemic hit. Many mortgage borrowers lost their jobs, while others saw their income decline.

To prevent a wave of foreclosures, mortgage borrowers were given the option to put their home loans into forbearance. Any homeowner who claimed financial hardship during the pandemic had the right to be granted forbearance, which allows borrowers to pause their loan payments without any type of financial penalty.

Initially, pandemic-related forbearance plans were set to expire after 12 months, but they were then extended to last up to 18 months. Currently, about 2 million homeowners have their loans in forbearance, and many of those plans will wrap up by the fall.

Fearing a massive foreclosure crisis, the Consumer Financial Protection Bureau (CFPB) initially sought to ban foreclosures until 2022. The agency is now reversing course a bit and won't be putting any further bans on foreclosures in place. It will, however, be offering certain protections to homeowners that are designed to prevent foreclosures from happening.

Struggling homeowners still get a fair amount of relief

Some homeowners who are about to exit forbearance may not yet be in a position to afford their monthly mortgage payments. To protect people in this boat, the CFPB has issued a new rule that will go into effect on August 31, 2021.

Under that rule, the following protections will be put into place for borrowers who are more than 120 days behind on their home loan payments.

  • A loss mitigation application must be submitted by a borrower and reviewed by a loan servicer before foreclosure can start. The point of this is to explore options outside of foreclosure and only resort to foreclosure once those other options have been exhausted.
  • Loan servicers must confirm that the properties they're looking to foreclose on are abandoned before initiating foreclosure proceedings.
  • Loan servicers must make a reasonable effort to contact borrowers before initiating foreclosure proceedings. Those proceedings can only begin if a borrower is more than four months behind on payments and unresponsive for more than 90 days.

Furthermore, for those who are behind on their mortgages, loan services must offer a minimum of these three options before initiating foreclosure proceedings.

  • Resume regular payments and defer paused payments to the end of their mortgages
  • Modify the terms of their mortgages, whether by extending repayment periods or adjusting home loans' interest rates
  • Sell their homes (an option that may be viable for a lot of people in today's market, what with home values being so high)

These protections will remain in place from August 31 through January 1 and come on top of the protections that prohibit loan servicers from initiating foreclosure proceedings until a borrower is more than 120 days delinquent on a mortgage.

If loan servicers follow these guidelines, they will be allowed to start foreclosure proceedings this year. But given the timeline of forbearance exits and the parameters of these guidelines, it's clear that the CFPB's new rule will, indeed, prevent a lot of foreclosures from happening -- even if the agency isn't going so far as to ban them outright.

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