New rules protect mortgage borrowers

With the goal of preventing a sudden rise in foreclosures as federal bans are phased out, the Consumer Financial Protection Bureau has amended the federal mortgage servicing regulations.

The new rules create temporary safeguards to give borrowers time before foreclosure to explore their options, such as selling their homes or loan modifications. The rules apply to loans on principal residences, but generally do not apply to small servicers.

They went into effect on Aug. 31. “As the nation shifts from the COVID-19 emergency to the economic recovery, we cannot be complacent about the dangers we still face,” CFPB Acting Director Dave Uejio said in enacting the rules.

Uejio said that by preventing a sudden wave of foreclosures, the rules protect Black and Hispanic communities that were hard hit by the pandemic and avoid an overall destabilization of the housing market.

During the pandemic, more than 7 million homeowners took advantage of COVID-19 hardship forbearance. That action temporarily paused their obligations to pay their mortgage payments. As of the end of June, over 2 million homeowners were still in forbearance, most of whom were expected to remain in forbearance for more than a year. More than 3% of borrowers were four months or more behind on their mortgages — that’s when a foreclosure may be initiated in usual circumstances. Nearly 1 million homeowners are expected to exit forbearance by the end of the year, putting them at risk of foreclosure.

Foreclosure prevention

The new CFPB rules require mortgage servicers to work even harder to prevent foreclosures. The rules will do the following:

  • •Require mortgage servicers to meet special procedural safeguards before initiating foreclosures for certain mortgages through the end of 2021. The goal is to give borrowers time to pursue other options.
  • Allow servicers to offer streamlined loan modifications to borrowers with COVID-19-related hardships without requiring them to fill out paperwork for every option. Modifications under this provision may not increase borrowers’ payments and will provide other protections as well.
  • Require more outreach to borrowers before a servicer can initiate foreclosure.
  • Mandate that servicers tell borrowers essential information about their repayment or other options when they are exiting forbearance or having difficulty making mortgage payments. Under the rules, homeowners exiting forbearance generally have three options:
    • Resume their regular payments, with any missed payments deferred to the end of the mortgage.
    • Reduce the amount of their monthly mortgage payments. Such a modification could change the interest rate, principal balance or length of the mortgage.
    • Sell their home. While selling might be possible for homeowners with enough equity, long-term forbearance can also reduce borrowers’ equity. If a significant number of homeowners sell as a result, home prices might go down.
  • Foreclosures cannot be avoided in some cases. Under the CFPB rule, foreclosure may begin if the borrower:
    • Has abandoned the property;
    • Was more than 120 days behind on their mortgage before March 1, 2020;
    • Is more than 120 days behind on their mortgage payments and has not responded to specific required outreach from the mortgage servicer for 90 days; or
    • Has no other available options to avoid foreclosure

Smaller property investors might be hurt by tax plan

Consider a medical practice that owns an office building worth $1.1 million that it initially purchased for $500,000. In a 1031 exchange, the practice can sell the current building and buy another office building, thereby deferring capital gains taxes.

However, under Biden’s new plan, the medical practice would be required to pay capital gains taxes on the profit above the $500,000 exemption. Such a hit in taxes could make it difficult for older people looking to exchange their home for a place with less maintenance needed as they retire. It could also lead to increased rent prices for small businesses, with landlords trying to recoup their losses.

A coalition of trade associations, including the Mortgage Bankers Association and National Association of Realtors, has submitted a letter to the Senate Finance and House Ways and Means committees and Treasury Secretary Janet Yellin, asserting how important 1031 exchanges are to the U.S. economy and how many jobs they support.

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