Guidelines for turning forbearance into modification to avoid foreclosure

ForeclosureThe covid-19 pandemic affected the livelihoods of many peoples across the U.S. due to heavy lockdowns, business disruptions and quarantines.  Millions of people lost their jobs and many consumers had trouble paying out loan payments, such as mortgages, student loans, auto loans and credit card payments. Due to increasing hardships, loan forbearance and foreclosure moratoriums provided relief for many consumers during the pandemic. 

Loan forbearance is a sort of relief that allows borrowers to reduce or suspend the payment of loans for a short period of time. However, these plans do not mean that a borrower has been discharged from his/her liabilities; it is instead a temporary help to Covid-related problems in making payments.

In response to the Pandemic, the CARES Act was established in early 2020, which allows forbearance to consumers for federally insured mortgages and federal student loans. The act also protects the credit histories of the consumer in terms of forbearance.

Millions of Americans took advantage of the forbearance program during the covid-19 season but as these programs started to shut down this year, the Consumer Financial Protection Bureau (“CFPB”) has done its best to develop a plan for people to avoid foreclosure. The new plan will offer options to borrowers to immediately modify the status of their account before foreclosure becomes a reality. 

Consumer Financial Protection Bureau developed a plan that lenders have to follow before actually initiating foreclosure:

  • Give sufficient time to borrowers to find out loss mitigation options: The lender must give sufficient time to the borrower and review a loss mitigation application diligently, submitted by the borrower that highlights the borrower’s financial and household position, which could be helpful for lenders in determining next steps.
  • Mortgage servicers should make the process speedy to help borrowers: The new rule allows service providers to offer loan modification to borrowers with less paperwork formalities. The hope is that borrowers can get flexibility from these new streamlined loan modification procedures and avoid home loss.
  • Give borrowers their options: servicers should communicate with borrowers prior to initiating foreclosure and give other options to borrowers who are struggling to make payments as they are exiting forbearance. 

The new rule will give some sort of flexibility to services on homeowners exiting forbearance.  Homeowners will have to decide the best fit for them according to their individual and family needs. In general, borrowers will have two options to bring their account current and avoid foreclosure, and a third option of selling their home.  These options are:

  1. Ensure regular mortgage payments: Borrowers can resume their mortgage payments while moving missed payments to the end of the mortgage.
  2. Change payment terms: Modification in payment terms, either change in principal amount, interest rate or mortgage length
  • Sell your homes: If the borrower thinks that they have sufficient equity, a sale could be a better option. However, most homeowners in default don’t wish to sell their homes and move. 

There are various cases when foreclosure is not avoidable, In this case, the foreclosure will start instantly if the borrower:

  • Has abandoned the property.
  • Was more than 120 behind on their mortgage before March 1, 2020.
  • Was more than 120 behind on their mortgage payments and has not responded to. the service provider within 90 days.
  • There is no other option left to avoid foreclosure.

Avoiding foreclosure is the goal when exiting forbearance, homeowners need to fully utilize all available options before making a decision, whether you are modifying a loan or going to make payments for the months you missed or selling your home. All of the options are better than losing your home in foreclosure.

The key to surviving the end of Covid protection and the end of forbearance agreements is to seek immediate help from your bank or servicer along with experienced legal advice from an attorney specialized in foreclosure defence and home retention.