The Consumer Financial Protection Bureau (CFPB) government is moving to ban most foreclosures until the start of 2022. But rather than extend existing moratoriums, the Consumer Financial Protection Bureau (CFPB) instead wants to change mortgage servicing rules. It’s a new way to regulate real estate financing but is it necessary?
To this point the federal government has had no problem establishing and extending foreclosure moratoriums. The moratoriums announced by the FHA, VA, USDA, Fannie Mae, and Freddie Mac will end June 30th. There has been no congressional action challenging the moratoriums. At the Supreme Court, no one is testing the 1934 Blaisdell decision, a ruling that said the state of Minnesota — and thus governments in general — can lawfully suspend foreclosures.
What the CFPB is doing is different and unique. Instead of extending moratoriums, the CFPB wants to create “a special pre-foreclosure review period that would generally prohibit servicers from starting foreclosure until after December 31, 2021.” In addition, it wants servicers to “offer certain streamlined loan modification options to borrowers with COVID-19-related hardships.”
The CFPB says we need new rules because the country is on the verge of a massive foreclosure surge.
“Millions of families are at risk of losing their homes,” explains the Bureau. “As of February 2021, there were nearly 3 million homeowners behind on their mortgages, with an estimated 2.1 million mortgages in forbearance and at least 90 days delinquent. If current trends continue there may be 1.7 million such loans in September 2021.”
The problem is that the government’s own numbers hardly suggest a foreclosure flood. The CFPB itself acknowledges that if we do nothing the number of mortgage loans with 90-day delinquencies will decline by 1.3 million loans by September (3 million less 1.7 million).
RealtyTrac estimates that there were only 11,281 foreclosure filings in February, down 77% from the year before. That’s a remarkably low number, a by-product of the national foreclosure moratoriums created by the federal government. But what happens when the moratoriums end? That’s the real question raised by the new CFPB rules.
Why fewer foreclosure are likely
Rick Sharga, RealtyTrac‘s Executive Vice President, says “the number of mortgage borrowers at risk is likely far smaller than the delinquency levels suggest because most homeowners now hold far more equity than even a year ago. The National Association of Realtors reported that in February the typical existing home sold for $313,000 — that’s 15.8% higher than in February 2020. If you go back just two years, the typical existing home sold for just $249,500 in February 2019.”
Most property owners have a growing equity balance not only because of rising property prices but also because of the way we buy and finance homes.
For instance, imagine that the totally-average Smiths bought a home for $249,500 in February 2019 with FHA financing. They would purchase with 3.5% down and pay the going rate at the time,. 4.37% according to Freddie Mac. They would also be required to pay a 1.75% upfront mortgage insurance premium (the upfront MIP). If we assume they stopped all mortgage payments in February 2020 their loan situation would look like this:
Purchase price: $249,500
Down payment: $8,7323 (3.5%)
Upfront MIP: $4,366 (1.75%)
Initial mortgage amount: $245,134
Monthly cost for principal and interest: $1,223.19
Monthly FHA mortgage insurance premium: $170.54
Monthly mortgage payment: $1,394
Mortgage balance as of February 2020: $241,087
Unpaid interest for 12 months: $10,535 ($241,087 x 4.37% for one year)
Unpaid FHA MIP for 12 months: $2,046 (12 x $170.54)
Total mortgage debt as of February 2021: $253,668 ($241,087 + $10,535 + $2,046)
Total equity: $59,332 ($313,000 less $253,668)
Closing check: roughly $34,292 ($59,332 less $25,040 – an amount equal to 8% of the selling price for marketing and closing costs)
The bottom line: Delinquent homeowners likely have the potential to sell the property in this example and walk away from closing with a $34,000 check. In cases where the servicer pays property taxes, HOA fees and other costs the settlement total will be reduced. For details and specifics regarding a particular mortgage be sure to speak with your loan servicer.
Being forced to sell a home is surely not attractiveideal, but it’s better than a foreclosure and related expenses, an amount the CFPB estimates will be at least $12,500. Also, average national market prices and sale results may not reflect local conditions. It is certain that home prices in some communities have seen less appreciation, meaning owners may not be able to sell for enough to fully repay the mortgage.
Alternatively, if delinquent homeowners have owned the property for a longer period, say five years, then they are likely to have even more equity. According to NAR, in 2020 the typical existing home was owned for 10 years before selling, and ATTOM Data Solutions reports that over 70% of homeowners have more than 20% equity.
Other foreclosure defenses
It’s not just mounting equity that protects most homeowners against foreclosure. The government itself has constructed formidable defenses to protect mortgage borrowers.
First, the forbearance agreements created by the government have a built-in safety feature: Once forbearance ends a borrower can resume payments and add any unpaid amounts to the mortgage debt. “The deferred payments,” says Freddie Mac, “will be due at the end of the loan, such as when your loan is paid off, refinanced, or your home is sold.”
Second, the $1.9 trillion American Rescue Plan Act of 2021 enacted in March includes $9,961,000,000 for a Homeowner Assistance Fund. The money goes to the states to help keep owners out of foreclosure.
Will the CFPB plan go through?
The CFPB plan is a proposal, there is a 60-day public comment period, and it’s possible that the final rule will be different. It is also possible that Congress might reject the proposal and — unlike today’s foreclosure moratoriums — the CFPB plan could wind up in court where delays and adverse rulings are possible.
Under the rule changes, the CFPB is using the threat of bureaucratic leverage, saying “we will do everything in our power to ensure servicers work with struggling families to find solutions that prevent avoidable foreclosures.”
If you’re a well-regulated mortgage servicer you get the message. Toe the line. Or else.
That’s hardly an attractive approach, especially when an extension of the existing foreclosure moratoriums can accomplish the same goal.