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Posted April 20th, 2012 under Government Mortgage Help

Could New Rules from the Federal Government Help Underwater Homeowners Avoid Foreclosure?

Tags: avoid foreclosure, foreclosure help, underwater mortgage

Could New Rules from the Federal Government Help Underwater Homeowners Avoid Foreclosure?

Earlier this month, the federal government's Consumer Financial Protection Bureau (CFPB) unveiled a set of proposed rules designed to improve the way that mortgage servicers communicate with homeowners, especially those who have an underwater mortgage. (A mortgage servicer is the company that collects your mortgage payments and handles loan modifications and foreclosures.) The rules are in response to complaints of fraud and other problems within the mortgage industry, and one goal of the proposed changes is to help homeowners better manage their mortgages and hopefully avoid foreclosure.

“The mortgage servicing rules we are considering reflect two basic, common-sense principles – no surprises and no runarounds,” said Richard Cordray, director of the CFPB in a statement. “For too long, mortgage servicers have not been held accountable to their customers, and the result has been profoundly punishing to homeowners in distress. It’s time to put the ‘service’ back in mortgage servicing.”

So what exactly is the CFPB recommending? Here's a list of some of the proposed changes.

  • Mortgage servicers would be required to provide clear monthly mortgage statements to homeowners. These statements would clearly show principal, interest, fees, escrow, and due dates.
  • Homeowners with certain adjustable rate mortgages (ARMs) would be warned before their rates were adjusted. The lender would have to make it clear how it determined your new interest rate, as well as when the new rate takes effect, when future adjustments are scheduled to occur, and whether there are alternative options for you to consider if you can't afford the new mortgage payment.
  • Mortgage servicers may have to let homeowners know in advance if they're going to be charged for "force-placed" insurance. Servicers sometimes purchase "force-placed" insurance on behalf of the homeowner, if the borrower has failed to maintain hazard insurance on their property. However, insurance purchased by a mortgage servicer typically costs more than insurance a homeowner could buy on their own.
  • Mortgage servicers would be required to make a "good faith" effort to reach out to struggling homeowners (such as those with an underwater mortgage) and let them know about different foreclosure help options.

The CFPB has also recognized that some mortgage servicers have not done a good job of working with consumers, particularly when it comes to addressing errors. To help reduce problems in the future, the government has proposed the following rules.

  • Payments must be credited to a borrower's account the day they are received. 
  • Records kept by the lender must be up-to-date and accessible.
  • Errors must be quickly addressed and corrected.
  • Homeowners must have access to mortgage servicer staff members who can access the borrower's records and help them address their concerns.

The CFPB's proposed rules will be open for public comment this summer and should be finalized by early 2013. If the rules are adopted, they should provide increased transparency and accountability in the mortgage servicing industry, which should benefit homeowners.

While the rules aren't yet in place, more straightforward and open communication with mortgage servicers in the future should help homeowners who have an underwater mortgage and are hoping to avoid foreclosure. If you take advantage of Homeowner 101's Underwater Homeowners Assessment and Action Plan, we'll include any information you receive from your mortgage servicer in our analysis of your options. And once you have a better idea of where things stand with your mortgage (and how it affects the rest of your financial situation), you'll be better able to make a decision that works for you and your family.