On April 5, the Consumer Financial Protection Bureau (CFPB) proposed new servicing requirements that would give borrowers and servicers additional time for loan workout before initiating foreclosure. The proposal would prohibit foreclosure filings from the effective date of the final rule to December 31, 2021. The CFPB’s goal of preventing avoidable foreclosures is well intentioned, but a blanket prohibition is both unnecessary and would create additional cost in the system.

Improvements to the loss mitigation toolkit post-2008, especially for federally backed mortgages, require a prescribed waterfall in which foreclosure is the very last step. Many seriously delinquent loans were delinquent before the pandemic started and have likely exhausted all preforeclosure options. Some properties may even be vacant. Both should be exempted from the prohibition. Delaying foreclosures would not only prolong uncertainty, but would also prevent these properties from being sold to new buyers, who are chasing diminishing supply. Foreclosure filing notices can also sometimes motivate unresponsive borrowers to negotiate alternatives with their servicer. Delaying foreclosures would delay alternatives, too.

A better option is to require servicers to evaluate borrowers for all loss mitigation for which they are eligible. To prevent avoidable foreclosures, the CFPB could require servicers to make an explicit determination, supported by internal documentation, that the borrower was evaluated for and either failed or declined all nonforeclosure options. If the CFPB still opts to institute a foreclosure prohibition, it should consider only applying it to pandemic-related delinquencies, allowing foreclosures to proceed for pre-pandemic delinquencies.

The foreclosure prohibition won’t help most borrowers

According to Black Knight, 1.9 million mortgages were seriously delinquent at the end of March 2021. This count excludes loans already in foreclosure. More than 78 percent, or 1.5 million mortgages, were agency backed, while the remaining one-fifth, or 412,000, were non-agency loans—primarily portfolio and private-label security (PLS) loans. This is an important distinction because loss mitigation waterfalls and servicing guidelines for agency loans are detailed, well developed, and publicly available. These borrowers will be offered the opportunity to resume pre-COVID-19 payments, with the forborne payments not repayable until the end of the mortgage. Borrowers unable to resume pre-COVID-19 payments at the end of forbearance will be evaluated for loan modifications. This can take weeks to finalize, and often require three to four months of trial plan payments.

Serious Delinquencies before and during the COVID-19 Pandemic, by Channel

Source: Black Knight data as of March 2021.
Notes: FHA = Federal Housing Administration; GSE = government-sponsored enterprise; SDQ = serious delinquency; VA = US Department of Veterans Affairs. Numbers exclude loans in active foreclosures.

Agency borrowers who entered forbearance in April 2020 can remain in forbearance for 18 months (through September 2021). It’s unlikely that these borrowers, who were the earliest to enter forbearance, will complete all loss mitigation before January or February 2022, making the foreclosure delay redundant. Some borrowers will see permanent reductions in their postpandemic incomes and may not be able to afford modifications. They would be evaluated for foreclosure alternatives, which requires multiple rounds of communication and borrower notice and take several weeks or months. Per the Federal Housing Administration’s loan performance report, it has historically taken more than 10 months from the first missed payment until foreclosure filing, making it unlikely agency borrowers will exhaust the entire loss mitigation waterfall before December 2021. Other borrowers may be unreachable or unresponsive to servicer communications. It would make sense to initiate foreclosure because filing notices might motivate them to act.

The same argument holds for pre-pandemic delinquencies. More than a quarter of all seriously delinquent loans that were not in foreclosure at the end of March 2021 (517,000 of the 1.9 million loans) were delinquent even before the pandemic started. Nearly 180,000 of these never entered COVID-19 forbearance and were not in active loss mitigation in March, according to Black Knight. This suggests loss mitigation has been exhausted, and these loans are unlikely to be cured with additional time. Some of these homes are likely vacant, abandoned, or in disrepair. Delaying the inevitable would serve neither the borrower nor the neighborhood in which the home in located.  

And what about the 264,000 portfolio and PLS loans that became delinquent during the pandemic? According to the Mortgage Bankers Association, about 80 percent of monthly forbearance exits in recent months are borrowers with payment deferrals or loan modifications or borrowers who stayed current during forbearance, were reinstated via a lump-sum payment, or refinanced. Only 20 percent have exited without loss mitigation in place. Because this 20 percent includes borrowers working on loss mitigation, the actual share is likely lower. But even if this 20 percent share persists, about 124,000 non-agency borrowers (i.e., 20 percent of 618,000 portfolio and PLS borrowers in forbearance at the end of March) could exit without loss mitigation in place. And this is a high estimate. As the job market improves and vaccinations rise, future exits are more likely to be deferrals or loan modifications. Either way, this is only 5 percent of the aggregate 2.3 million loans in forbearance today. And this specific issue for non-agency loans could be addressed by making foreclosure determination dependent on the outcome of loss mitigation, as we suggested up front.

The pandemic is different from the last housing crisis. With strong appreciation, most borrowers have substantial home equity, which has increased during the pandemic. As such, most uncurable loans, whether agency or non-agency, will be resolved via a market sale. Very few loans, where borrower is unreachable or the property vacant would take the foreclosure route. This would render the proposed prohibition largely redundant—and counterproductive—as properties would be held back from the market at a time when supply is tight.

We must do everything we can to keep as many homeowners as possible from losing their homes. This can be achieved by ensuring that borrowers have access to sustainable modifications and that they are evaluated for all loss mitigation options before initiating foreclosure. At the same time, the pandemic will leave the economy with permanent changes; not every job that has been lost will come back. And homeowners who were struggling before the pandemic or are unreachable are much less likely to cure with additional time.

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