With tens of millions of mortgages outstanding it might seem as though every possible loan question has been resolved, that the lending system would have an answer for absolutely any situation that might arise.
It turns out that’s not the case, at least according to the Consumer Financial Protection Bureau (CFPB). It argues that the mortgage system is filled with gray areas, situations where the rules are incomplete or uncertain. To fix such problems it’s issued a series of proposed clarifications for mortgage servicers, the people who collect monthly payments.
The idea is to end unnecessary foreclosures, complications and costs. That sounds great, but not every idea is likely to be a winner for the nation’s borrowers. Here are the most-important proposals, ideas which are likely to go into effect early next year.
More Than One Modification
Under current guidelines borrowers have a series of potential foreclosure protections but they only get one chance for a mortgage modification. Under the proposed CFPB standard borrowers will now be allowed to seek a modification more than once.
The logic is that mortgages last as long as 30 years and it doesn’t make sense to help people avoid foreclosure once and then ignore such protections if they’re needed again — think of the loss of a job because a company closes today or the death of a spouse in a few years. Neither is the fault of the borrower and in either case the lender will have a huge loss if the property is lost. Thus, as a matter of common sense borrowers should be able to get modification help more than once.
What’s unclear about the rules is how often a borrower can seek a modification. Can a failing borrower seek a loan modification three times? Twelve times? Borrowers in modification trials cannot be foreclosed so if an individual can continually seek modifications then foreclosures can be avoided simply by enrolling in a series of modification trials. Look for lenders to seek a limit on the number of modifications which can occur during the life of the loan.
Another issue is whether the rules will apply equally to both residential real estate and investment properties with one to four units. As the government has found with its Making Home Affordable programs, including small investors is a good way to help maintain local property values.
New Rights For Survivors
Mortgages contain what’s called a “due-on-sale” or “acceleration” clause, language which allows the lender to require the entire loan to be immediately repaid in certain circumstances. For instance, you just can’t assign your mortgage to someone and tell the lender you’re no longer responsible for the debt.
The catch is that under the Garn-St.Germain Act there are certain circumstances where lenders generally cannot prevent transfers. For instance, when a borrower dies lenders cannot stop the transfer of the loan “to a relative” nor can they stop a “transfer where the spouse or children of the borrower become an owner of the property.” In other words, you can add your children or spouse to the title without triggering a due-on-sale clause and you can will your property to a relative without the need to get new financing.
What the CFPB is now proposing is a refinement of the rules to “expand the circumstances in which consumers would be considered successors under the rules.” The enlarged transfer opportunities, says the Bureau, “include when a property is transferred after a divorce, legal separation, through a family trust, between spouses, from a parent to a child or when a borrower who is a joint tenant dies.” Such successors will “generally receive the same protections under the CFPB’s mortgage servicing rules as the original borrower. Such protections include the right to get information about the loan and right to the foreclosure protections.”
Lenders are likely to support the new rule if it means that a responsible party will take over the mortgage and help the lender avoid a foreclosure. However, some lenders will oppose the rule because it means that successors will be able to keep fixed-rate loans, even with rates far below then-current levels.
Borrowers are required to maintain hazard insurance as a condition of having a mortgage. If the insurance expires or is expiring the lender has the right to step in and require the borrower to use insurance of the lender’s choice, what is called “force-placed insurance.” According to the New York’s Department of Financial Services, “the premiums charged to homeowners for force-placed insurance can be two to ten times higher than premiums for voluntary insurance — despite the fact that force-placed insurance provides far less protection for homeowners than voluntary insurance.”
The CFPB now proposes that lenders should also have the right to require forced-placed insurance “when a servicer wishes to force-place insurance because the borrower has insufficient, rather than expiring or expired, hazard insurance coverage on the property.” Given mark-ups of as much as ten times standard rates, it’s hard to imagine how this proposal does not create new opportunities to overcharge for needless coverage.
Lenders are supposed to end foreclosures if they receive a modification application 37 days before a scheduled sale. However, the CFPB reports that some borrowers are not getting this protection and as a result the government wants a new rule which says “servicers who do not take reasonable steps to prevent the sale must dismiss a pending foreclosure action.”
If this rule goes into effect it will give a lot of fire power to borrowers and their attorneys who will comb through lender modification proposals in an effort to say that such efforts were inadequate. Look for lenders to oppose this rule.
Also, under the proposed rules lenders would have to tell borrowers when loss mitigation applications are finished. This is hugely important because, “when a borrower completes a loss mitigation application, key foreclosure protections take effect.” In other words, if the application is delayed the borrower does not have protections available with a loan mitigation and the result can be a wrongful foreclosure.
What does it all mean?
For the nation’s 3,000 financial lobbyists the proposals are a year-end gold mine, one that will yield calls for clarifications, delays, lawsuits, complaints on Capitol Hill and a big jump in billable hours. On the other hand, having more than one shot at mortgage relief will help many borrowers and a better deal for survivors is good news. Unfortunately, the opportunity to expand the use of force-placed insurance is a downer. All in all, it’s two steps forward and one step backward, not a bad ratio for federal rule changes.