Foreclosure rates in California and around the country dropped dramatically during 2020, due in part to the federal moratorium on foreclosure of government-backed mortgages. Nationwide, 2020 was a record-low year for foreclosures, with starts down 67% and foreclosure sales down 70% compared with 2019.
The moratorium is still in effect, but foreclosures are already on the rise. In California, new foreclosures were up 36% in the first quarter of 2021. Riverside, California made the list of major metros with the highest foreclosure rates nationwide. And, California was in the top three states for bank repossessions of real estate. This shift already represents a threat to many California homeowners in an environment with still-high unemployment and other pandemic-era protections falling away. But, many experts fear, the worst is yet to come.
Federal agencies, including the Consumer Financial Protection Bureau (CFPB) and the Federal Housing Finance Agency (FHFA) are taking action to ease the transition and provide some buffer protections to many homeowners who fell behind during the pandemic. But, not everyone is protected, and some action may be required on the part of the homeowner to take advantage of protections offered.
Mortgage Forbearances and Delinquencies During Covid
More than six million mortgages were in forbearance for some or all of the past year. Most of those homeowners have now exited forbearance, either through modification, by catching up skipped payments, by resuming their regular payments, or because they continued to make payments during the forbearance period. But, as of mid-May, the Mortgage Bankers’ Association (MBA) said there were still more than two million mortgages in forbearance. Some of those forbearances are voluntary accommodations offered by private lenders. But, many are forbearances of government-backed mortgages that were federally mandated.
The most recent extension of the foreclosure moratorium will expire on July 31, and it’s virtually certain to be the last.
Many of those borrowers could face serious problems when the forbearances run out and the moratorium protecting many homeowners expires. Unsurprisingly, the New York Federal Reserve found that struggling borrowers and those in low-income neighborhoods were most likely to lean on forbearances. While many used the forbearance as a safety net and continued to make some or all mortgage payments as they were able, 60-70% made no payments during forbearance. For these borrowers, mortgage balances have often increased.
What Happens When the Foreclosure Moratorium Ends?
Fortunately, the July 31 expiration of the current orders won’t open up a foreclosure free-for-all. The CFPB issued temporary new mortgage servicing regulations intended to prevent “unwelcome surprises.” Those new rules don’t take effect until the end of August, but the FHFA is requiring services to adapt now. That means most homeowners with government-backed mortgages are safe from foreclosure actions until the end of 2021.
But, there are exceptions.
In California, state law offers some additional protections to homeowners and to small landlords with properties of up to four units. These state-level restrictions will remain in place until December 1, 2021. But, the state-level protections are focused on the forbearance process, and apply only to borrowers who were current as of February 2020 and who were financially impacted by Covid-19.
Even if you’re protected by state law or federal rules in the short-term or are able to secure a forbearance, it’s important not to rely too heavily on the reprieve. If borrowers don’t use that buffer period to find a longer-term resolution, the delay will only push back the inevitable.
Who Isn’t Protected by the Federal Rules?
Under the new rules, servicers of federally-backed mortgage loans can foreclose if:
- The property has been determined to be abandoned or vacant
- The borrower was already at least six months in arrears as of March 2020
- The borrower has submitted a loss mitigation application and been found ineligible
- The borrower breaks a loss mitigation agreement or rejects an agreement offered
Borrower options vary somewhat depending on the type of mortgage. For example, some (including HUD, USDA and the VA) are accepting forbearance applications through September. So, it’s important to contact your mortgage service and ensure that you fully understand the options available for your loan.
Bankruptcy and Foreclosure
The California state law and federal rules are intended to provide a buffer that allows homeowners (and in some cases, small landlords) knocked off track by the pandemic to get back in good standing and avoid foreclosure. But, these protections don’t extend to all borrowers. California foreclosure actions are already on the rise, and will likely continue to climb as forbearances expire, loss mitigation efforts fail, and protections fall away. The new rules aren’t a solution, but a dam that slows the flow and gives borrowers time to prepare.
For homeowners who are too far behind to get their loans back in good standing during the time allowed or who aren’t covered by the current protections, bankruptcy may offer a long-term solution. Chapter 13 bankruptcy may allow a homeowner in default to build the past-due balance into a three to five-year repayment plan while continuing to make current payments on schedule.