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3 Predictions For Mortgage Industry As Foreclosures MountRead Time: 8 mins
While the COVID-19 pandemic continues to rage, various relief measures designed to assist borrowers facing hardships related to COVID-19 are quickly coming to an end.
With still over 1 million mortgages in forbearance plans as of early November, will the predictions of a deluge of borrowers all seeking loss mitigation relief at the same time come to fruition and overwhelm mortgage loan servicers and result in a cascade of foreclosure filings? Or will the various rules, regulations, and policies implemented by the U.S. Consumer Financial Protection Bureau, government-sponsored enterprises (or GSEs), and loan servicers themselves avoid such dire estimates?
First, some background.
Trying to Stem the Tide
On March 27, 2020, President Donald Trump signed into law the Coronavirus Aid, Relief and Economic Security, or CARES, Act.
With respect to residential mortgages, the CARES Act did two things. First, it enacted a foreclosure moratorium on certain loans. Second, Section 4022 of the CARES Act provided a borrower with a federally backed mortgage loan experiencing a financial hardship due, directly or indirectly, to the COVID-19 emergency, the opportunity to enter into a forbearance plan up to almost a year in length.
Over 7 million borrowers have taken advantage of the forbearance plans under the CARES Act and millions more benefited from various state and GSE-specific foreclosure moratoriums.
And while the number of borrowers in active forbearance plans continues to drop, the numbers show two things: (1) the number of borrowers 90-plus days delinquent is nearly four times as high as prior to the pandemic; and (2) borrowers are more than $64 billion in arrears on residential mortgage loans — double that from prior to the start of the pandemic in March 2020.
Recognizing that the ways loan servicers may have handled loss mitigation in the past — including the allocation of resources and communication methods used — may not be as effective to assist the large number of borrowers experiencing hardships related to COVID-19, along with a concern that a potentially historically high number of borrowers will seek assistance from their servicers at approximately the same time, the CFPB amended Regulation X, effective Aug. 31, to address these issues.
The CFPB’s amendments were designed to do two things: (1) establish temporary procedural safeguards to assist borrowers facing a hardship related to COVID-19 while providing loan servicers with the flexibility to offer various loss mitigation options without the necessity of having a complete loss mitigation application; and (2) codify various additional safeguards that must be met before commencing a foreclosure action against a delinquent borrower.
In addition, the GSEs have also issued guidance and provided additional tools for loan servicers to assist borrowers coming out of a COVID-19 hardship,p including the use of repayment plans, payment deferrals, and flex — i.e., no-document — loan modifications.
Will these additional tools and procedural safeguards be enough to stem the rising tide of foreclosures? Here are a few predictions of what the new year might bring that loan servicers and those in the residential mortgage industry should consider.
1. The number of foreclosures will rise compared to pre-pandemic numbers but the loss mitigation tools available to loan servicers should keep the increase to a trickle as opposed to a flood.
Notwithstanding the CFPB’s attempt to avoid a flood of foreclosures, the reality is the number of foreclosure filings will increase from prior to the pandemic.
This will most likely be due to a combination of: (1) loans that were in default prior to the pandemic and foreclosure moratoriums reenter the foreclosure pipeline; (2) states begin to catch up on months of foreclosure filings that simply haven’t been processed during the pandemic; and (3) a significant number of borrowers have reached the end of their forbearance plans with no long-term mitigation solution yet in place.
Indeed, approximately 16.5% of borrowers exited forbearance plans with no long-term loss mitigation plan in place to cure their delinquency.
Numbers are already starting to support this trend. In August, foreclosure filings numbered 15,838 — up 27% from the month prior and up 60% from the prior year.
The number of foreclosure filings increased to 19,609 in September. Notably, 10,289 U.S. properties started the foreclosure process in September, up 23% from the previous month and up 106% from a year ago.
While these numbers represent significant increases from earlier in the year — when the foreclosure moratorium was still in effect — it is worth noting that the September filings are almost 70% lower than they were prior to the COVID-19 pandemic in September 2019.
That being said, the new Real Estate Settlement Procedures Act rules and GSE guidelines should assist in ultimately reducing the number of foreclosure filings.
Prior to the CFPB’s amendments, a loan servicer usually had to have a complete loss mitigation application before it could offer any type of loss mitigation options to a borrower. While the rule did not explicitly state what documents were needed for a complete loss mitigation application, RESPA made clear it included “all the information that the servicer requires from a borrower in evaluating applications for the loss mitigation options available to the borrower.”
This typically includes: pay stubs, tax returns, bank statements, utility bills, and a servicer or GSE’s specific loss mitigation application, among other items. That is a lot of financial information that takes both borrowers and loan servicers time to gather, sort, review and analyze — oftentimes frustrating loan servicers and borrowers alike when not all the required information is provided.
The RESPA amendments look to streamline this process for both borrowers and loan servicers.
Now, a complete loss mitigation application is no longer required to offer certain loss mitigation options to borrowers facing a hardship related to COVID-19. Instead, a loan servicer can offer: (1) a payment deferral; or (2) a loan modification based upon an incomplete application. This should not only streamline the loss mitigation process, but it should also deflate the ultimate number of foreclosures filed.
Likewise, the other temporary RESPA amendments should reduce the number of foreclosure filings, at least in the short term. The CFPB amended Title 2 of the Code of Federal Regulations, Section 1024.41(f), to provide additional safeguards for borrowers facing a COVID-19 hardship before a foreclosure filing can commence.
Currently, a loan servicer cannot proceed with the first foreclosure filing against such a borrower unless: (1) the borrower’s loan became more than 120 days delinquent prior to March 1, 2020; (2) the statute of limitations is set to expire prior to Jan. 1, 2022; or (3) one of the procedural safeguards has been met.
Those procedural safeguards include: (1) a completed loss mitigation application had been evaluated; (2) the property is abandoned; or (3) the borrower is unresponsive to the loan servicer’s inquiries. Given the temporary nature of these new safeguards many loan servicers have most likely made the decision to hold off on foreclosing on these loans until after the amendments expire on Jan. 1, 2022, further depressing the number of foreclosure filings in the interim.
Finally, one other factor should likewise keep the increase in foreclosure filings lower than anticipated: an increase in home values.
Home prices continue to rise throughout the country — roughly 30% in the last decade alone. And that trend has continued to increase. Indeed, the average annual equity gain was $51,500 in the second quarter of 2021 — five times the gain from the year prior. This led to a whopping $2.9 trillion increase in equity in mortgaged real estate — a 29.3% annual increase.
Unlike during the Great Recession when most borrowers were underwater on their homes, this increase in equity provides delinquent borrowers with the ability to avoid foreclosure, either by selling the home outright or engaging in non-retention loss mitigation, like a deed-in-lieu of foreclosure.
Ultimately, the increase in equity on mortgaged real estate should soften the number and pace of foreclosure filings in 2022 and result in a trickle — as opposed to a flood — of foreclosure filings like was seen during the Great Recession.
2. Expect to see an increase in RESPA and UDAAP, lawsuits against loan servicers related to loss mitigation activities.
Borrowers routinely bring lawsuits against loan servicers predicated on compliance with Title 12 of the Code of Federal Regulations, Section 1024.41, and the CFPB’s amendments to this rule provide additional avenues and legal grounds for more lawsuits.
In the past, borrowers had to establish that a complete or facially complete loss mitigation application had been submitted or that the loan servicer failed to exercise reasonable diligence in reviewing the application in order to state a viable claim related to loss mitigation.
Now, however, the amendments allow a borrower to be reviewed for loss mitigation assistance based upon an incomplete loss mitigation application. The amendments do not define what constitutes an incomplete application and borrowers could utilize that ambiguity to their advantage in lawsuits.
Likewise, the additional procedural safeguards to foreclosure, while temporary, provide another avenue for a RESPA lawsuit against a loan servicer.
One of the most frequent basis of RESPA lawsuits in recent years are dual tracking claims — that is, the servicer seeks to foreclosure at the same time it is reviewing a loss mitigation application — and the amendment’s additional procedural safeguards add another basis for a dual tracking type claim which, in turn, lends itself to a potential unfair or deceptive acts or practices, or UDAAP, violation as well.
While a loan servicer could avoid any such claim by waiting until after Jan. 1, 2022, to initiate foreclosure proceedings, the possibility for a lawsuit remains for servicers who decide to otherwise proceed to initiate foreclosure on borrowers otherwise protected by these new amendments.
3. The CFPB will be watching and an increase in enforcement activity is likely.
It doesn’t take a crystal ball to predict that President Joe Biden’s administration intends to step up enforcement and rulemaking activities across the board.
Indeed, comments from various administration officials make clear that they believed the CFPB got away from its central mission of protecting consumers during the Trump years.
For instance, Sen. Elizabeth Warren, D-Mass., has been quoted as saying that there is a “cop on the beat again.”
Former acting CFPB Director David Uejio has expressed similar sentiments, noting the CFPB is “taking a close look at previous policies that hampered the bureau’s effectiveness, and simultaneously working nonstop through supervision and enforcement to ensure financial institutions are treating consumers fairly and playing by the rules.”
Uejio also noted that the bureau is “planning to rescind public statements conveying a relaxed approach to enforcement of the laws in our care. We will also be reversing policies of the last administration that weakened enforcement and supervision.”
This has already proven true, as in May the CFPB rescinded the Statement of Policy Regarding Prohibition on Abusive Acts or Practices issued under then-director Kathy Kraninger in 2020. In rescinding the policy, the CFPB specifically noted that it intended to aggressively utilize its civil penalty and disgorgement powers where appropriate.
This aggressiveness is also evidenced by recent enforcement actions pursued by the CFPB.
Under Kraninger, the CFPB focused more on consumer education as opposed to seeking to penalize companies and financial institutions. In fact, while the CFPB brought a near-record 48 enforcement actions in 2020, 10 of those actions settled for $1.
Conversely, in the first post-Kraninger lawsuit brought by the CFPB in late February, it pursued immigrant bond company Nexus Services Inc., calling the use of an English language agreement in a situation where the clients did not understand English to be abusive, and the CFPB is pursuing other service providers under abusiveness standards.
Recent settlements also reflect significant monetary penalties recovered by the CFPB, including a May consent order with 3rd Generation Inc., a servicer of subprime auto loans, related to charging interest on late fees without disclosing the same which included a $50,000 penalty on late fees totaling around $556,000 — or roughly 11% of the amount at issue.
Likewise, in July, the CFPB entered into another consent order with fintech company GreenSky LLC that services and originates consumer loans. The consent order required rescission of the loans, totaling over $9 million, plus a $2.5 million penalty.
The Biden administration has also made clear that one of the near-term missions of the agency is to protect and assist borrowers and consumers who have been affected by the COVID-19 pandemic. Indeed, the CFPB’s comments to its RESPA final rules explicitly recognize this.
Add it all up, and it is easy to see that the Biden CFPB will be watching loan servicers closely in 2022 and beyond to ensure compliance with the amendments to Title 12 of the Code of Federal Regulations, Section 1024.41, with respect to assisting borrowers facing a hardship related to COVID-19 and ensuring various procedural safeguards are met prior to seeking to foreclose.
Loan servicers can expect and anticipate increased enforcement activities from the Biden CFPB if the bureau believes servicers are not complying with the letter or the spirit of these amendments.
This article was originally published in “Expert Analysis” on December 10, 2021, by Law360. The original publication is available here with a subscription.
 12 C.F.R. § 1024.41(b)(1).
 Molly Boesel, Strong Home Equity Gains in 2021 Lower Foreclosure Risk – CoreLogic® (last visited on November 12, 2021).
 See Weisheit v. Rosenberg & Associates, LLC , No. JKB-17-0823, 2017 WL 5478355, at *6-7 (D. Maryland Nov. 15, 2017) (finding that borrower stated a viable FDCPA claim for a servicer’s purported dual tracking in violation of RESPA).