The Consumer Financial Protection Bureau released a proposed rule on Monday that would bar servicers from starting on foreclosures until 2022. The CFPB also proposed streamlined processes for moving homeowners out of forbearance and into loss mitigation options. However, since the announcement, several industry leaders have expressed reservations about the blanket policy.
“My concern is that the bureau is overstepping its bounds and violating in essence agreements that have already been previously made,” said Dave Stevens, chief executive officer of Mountain Lake Consulting and former CEO of the Mortgage Bankers Association.
According to the CFPB, streamlining the process would allow servicers to get homeowners into less burdensome payments at a much quicker pace. But data shows that servicers are already serving borrowers well.
At the peak of forbearance, nearly 6 million borrowers were in some form of forbearance, but over half of those homeowners have since exited. According to MBA data, close to 86% of those who have exited did so with some sort of plan in place or they simply continued making their payments while they were in forbearance.
“I think the math speaks for itself how well the forbearance program has worked, and it’s one of the few times in my career that I have seen a government-initiated program adopted as well and executed as well by the industry as this one,” said Rick Sharga, executive vice president of RealtyTrac.
Pre-foreclosure sales are a promising alternative to foreclosures – here’s why
The great promise of short sales and other distressed pre-foreclosure sales as a foreclosure alternative is most fully realized in a competitive and transparent online auction marketplace.
Presented by: Auction.com
Both the FHFA and FHA have been clear that they want to give homeowners in COVID-related forbearance enough time for a soft landing, kicking the can down the road months at a time to avoid a foreclosure cliff. Foreclosures themselves are already the last options for servicers – the process is expensive, time consuming, and involves complicated litigation, depending on the state.
The CARES Act caused some confusion among servicers when it was first passed, however, Stevens worries that a foreclosure halt could potentially hurt relationships with investors long term.
“What they are doing is getting involved in a very complex process and it may be forcing servicers to violate covenants of the investor who bought the loan, and that’s the real challenge,” said Stevens. “They have a responsibility to protect consumers’ interest, but to now come in and intervene in areas of mortgage lending that have already been pre-litigated with rule-making created under a similar democratic regime creates a lot of confusion and distrust, which is the last thing we need right now.”
Some industry leaders expected the foreclosure proposal to more closely mirror that of the HAMP program, a series of initiatives during the Obama administration that took a more prescriptive approach for servicers to follow. Under HAMP, servicers extended the terms of loans after borrowers exited forbearance, lowered interest rates, deferred the principal balance and then walked borrowers through their options. The program expired in 2016.
“I was surprised we went all the way to the end game,” Sharga said. “Candidly, I’m not sure the CFPB has the legal standing to disrupt a contract law across the country, especially as some of these are private loans and there is a contract made between the borrower and lender. This is the first time the CFPB has really tried to interject itself in this dramatic manner. So I do suspect if they come out with this ruling, we might see legal challenges to it by somebody in the industry.”
Monday’s foreclosure proposal will be open for public comment until May 11 and would not go in to effect until the beginning of September, depending on industry response. Since its release, some organizations have already publicly commented on the CFPB’s recent actions.
Wells Fargo, one of the largest servicers in the U.S., said it supports the CFPB’s latest proposal and looks forward to commenting on it while simultaneously working with the organization to choose the best course of action for consumers.
“We are committed to working with the CFPB and other government agencies, the mortgage industry, community leaders, mortgage investors/guarantors and others in determining how to best serve our customers and communities, particularly racially and ethnically diverse communities that have been disproportionally impacted by the pandemic,” Wells Fargo said.
Carissa Robb, president and chief operating officer of Constant AI, a fintech providing automated loss mitigation, said the proposal could have potentially negative consequences on the larger housing market.
“Whether you agree to disagree with the proposal, the industry should also prepare for the consequences of such a moratorium, including the fact the strength of the housing market today may suffer, reducing property values and increasing deficiencies post-sale as an abundance of distressed properties flood the market over the next 24+ months,” Robb said.
“It will also introduce an increase of strategic defaults where the proposed regulations weaken the ability to enforce delinquency consequences; this population and credit risk is separate and apart from those exposed by unfair actions of servicers. We’re more than a year into the pandemic and more than a decade past the Great Recession – we have the tools and experience to do a better job at mitigating loss this time around,” Robb said.
The MBA’s current president and CEO, Robert Broeksmit, wrote an article today pointing out that the CFPB’s own 2020 consumer response report demonstrates how well servicers have been helping borrowers in forbearance. While overall, consumer complaints to the CFPB were up 54% year-over-year, complaints against mortgage companies were up just 7.5%, and complaints against mortgage servicers were actually down, by 3.5%.
In less than 10 weeks, Broeksmit noted, mortgage servicers successfully helped 4.3 million Americans enter forbearance plans. And according to Black Knight, servicers have advanced almost $19 billion in unpaid principal and interest to investors in the past year.
“We have a long and uneven road ahead of us, but the past has been insightful; no one wins when a loan fails,” Broeksmit said. “The ability for the industry and mortgage servicers to overcome the obstacles created by COVID-19 will depend on our ability to work together, listen and learn, and keep the best interests of the nation’s borrowers and lenders front and center.”
The CFPB has said it is watching servicers closely as they manage borrowers in forbearance. Last week the Bureau warned servicers that it is ramping up enforcement and will be specifically watching how they manage borrowers coming out of forbearance. This followed an earlier announcement where the Bureau announced it was rescinding seven of its temporary policies with special COVID flexibilities, effective April 1.
I agree with Mssrs. Stevens’ and Broeksmit’s concerns and arguments. The industry needs standards of performance issued by the CFPB. It should embrace the end goal of avoiding foreclosures where possible. This being said, most seasoned servicers will agree that foreclosure is a last resort. Servicers need the flexibility and running room to navigate the delicate balance between keeping loans active and making payments to their investors. By arbitrarily establishing a period of no-foreclosures, the incentive to borrowers to work with their mortgage servicer for a reasonable solution weakens the servicers’ ability to work out acceptable terms with their borrowers. That some servicers will move quickly to foreclosure can be managed by the existing regulations and standards established by the CFPB and increased oversight on the part of the CFPB.