If the number of delinquencies and home foreclosures that developed during the Great Recession may be analogized to the expanding growth of a snowball rolled down a hill, then the potential number of foreclosures resulting from the COVID-19 pandemic may more closely resemble the bursting of a dam.
The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) provided forbearance protections to eligible borrowers holding federally backed mortgages, while prohibiting mortgage servicers from initiating foreclosure actions against delinquent borrowers. These foreclosure moratoriums are slated to expire on June 30, 2021. While further extensions are currently under discussion, millions of borrowers could be at risk of foreclosure in the second half of this year.1
The Consumer Financial Protection Bureau (CFPB) is already anticipating a proverbial tidal wave.2 In addition to cautioning mortgage servicers to take all necessary steps to prevent avoidable foreclosures, the CFPB has also proposed amendments to Regulation X that are designed to ensure that borrowers impacted by the COVID-19 pandemic are thoroughly evaluated for loss mitigation options prior to any foreclosure action.3 The CFPB’s recent activity is anything but subtle and, when considered in light of the CARES Act provisions and repeated extension of COVID-related consumer protections over the past year, servicers would be correct to understand that helping impacted borrowers remain in their homes is the clear directive.
Herein lies the tension between what action may be taken and what action should be taken. A servicer and borrower may ultimately exhaust all available options and be left with the possibility of foreclosure. While servicers may be acting lawfully when initiating such foreclosures, pursuing a post-COVID foreclosure should be regarded as the option of last resort, in light of the significant countervailing regulatory and reputational risks.
Planning to Resume Foreclosure Activity
Many servicers struggled to roll out CARES Act forbearance relief last year and the CFPB subsequently noted that operational strains caused by borrower forbearance requests increased the risk of consumer harm. The extension of foreclosure moratoriums over the past year has provided servicers with time to plan for any operational and compliance issues once foreclosure activity resumes. However, servicers’ preparations have undoubtedly been complicated by the shifting regulatory environment, the unpredictability of borrower behavior during the pandemic, and the continued appreciation of property values across the country.
Now, with foreclosure moratoriums soon to expire, servicers should determine the number of accounts that will immediately become eligible for the initiation of foreclosure activity, as well as the number of accounts that may thereafter become eligible. This counting exercise is a first step that will assist servicers in sizing up their potential impacts and tailoring their preparatory efforts.
When deciding among multiple foreclosure preparedness plans, a risk assessment may be useful in identifying a servicer’s overall risk tolerance. Considering that the number of loans eligible for foreclosure will jump sharply at the end of the foreclosure moratoriums, compliance and operational challenges should be top-of-mind for servicers in order to avoid any regulatory repercussions. The CFPB has made clear that it will be scrutinizing foreclosure activity and expects that servicers will prioritize families experiencing hardship. Servicers should marshal resources to communicate with and address the needs of borrowers, and further, should carefully monitor regulatory updates to ensure that there are no gaps in compliance. COVID-19 also presents unique strategic and reputational risks that lenders should carefully weigh, including the risks of negative media coverage, brand erosion, and loss of consumer confidence.
To ensure that each borrower is presented with the workout opportunities they qualify for prior to a foreclosure resolution, servicers must ensure that eligibility criteria for each option is fair and clearly defined. Leaving aside the increased likelihood of regulatory scrutiny, it is always a sound fair servicing practice to fully document the loss mitigation options presented to the borrower, the borrower’s ultimate decision, and to the extent possible, the borrower’s reasoning for their decision. Finally, litigators, regulatory agencies, and consumer protection advocates have carefully followed claims of deficiencies in the rollout of CARES Act protections. It follows that deficiencies in the foreclosure process could compound a servicer’s legal and compliance risks.
Considerations Related to Foreclosure Counsel
The COVID-19 foreclosure moratoriums implemented in 2020 sent foreclosure rates plummeting to a record low.4 While the CARES Act protections helped struggling borrowers remain in their homes, law firms specializing in foreclosure actions have experienced countervailing impacts. In one of the most notable instances, the largest Pennsylvania firm representing lenders in residential foreclosure actions permanently closed its doors in October 2020.5 Countless other firms have been forced to reduce the size of their foreclosure practice areas.
While such high-profile closures may be more the exception than the general rule for law firms in 2020, several of Treliant’s mortgage servicing clients have noted concerns regarding the availability of foreclosure counsel when moratoriums expire later this year. Servicers should be mindful that the challenges faced by foreclosure firms and practitioners in 2020 could lead to high demand for their services in 2021. Moreover, there is a possibility that dockets in judicial foreclosure states, where a lender can only foreclose by filing a lawsuit, may experience COVID-related scheduling jams, leading to additional challenges and delays in court proceedings.
One Step at a Time
For any foreclosure activity in the current environment, advance planning will go a long way to avoiding the compliance and operational pitfalls many servicers experienced during the rollout of CARES Act forbearance protections, enabling them to respond “on the fly” to any unanticipated challenges that may arise. Chief among those challenges is monitoring for regulatory developments to ensure that future guidance and rulemaking are properly implemented, but as noted above, there are other challenging questions that cannot be ignored.
Robert Frost advised, “Don’t ever take a fence down until you know why it was put up.” In the time of COVID, the forbearance and foreclosure protections implemented by the CARES Act are the proverbial “fence” that was “put up” to help consumers facing COVID-related hardships to remain in their homes. As the country slowly moves toward a post-pandemic environment, borrowers’ finances will likely require continued care and time to heal. Admittedly and unfortunately, not all borrowers will be able to recover. For this reason, though, servicers should be cautioned against rushing to foreclosure actions upon the expiration of moratoriums.
With regulators promising a watchful eye on foreclosure activity, servicers must take care to ensure that all available retention options are exhausted before pursing foreclosures against struggling homeowners.
1 Housing insecurity and the COVID-19 pandemic. CFPB, March 2021.
2 Bulletin 2021-02 on Supervision and Enforcement Priorities Regarding Housing Insecurity. CFPB, April 2021.
3 Protections for Borrowers Affected by the COVID-19 Emergency Under the Real Estate Settlement Procedures Act (RESPA), Regulation X: Proposed rule and request for public comment. CFPB, April 5, 2021.
4 Ostrowski, Jeff. “Foreclosures fell to record low in 2020–with a huge asterisk.” Bankrate, 22 Jan. 2021.
5 Blumenthal, Jeff. “Philadelphia law firm abruptly closes; managing partner joins rival,” Philadelphia Business Journal, 15 Oct. 2020.