Puerto Rico mortgage sector flooded by loss mitigation claims
Editor’s note: This article originally appeared in the May 24-30, 2018, issue of Caribbean Business.
There are 55,000 homes in foreclosure proceedings and thousands of homeowners are delinquent with their mortgages, a problem that is made worse by the fact that borrowers know little about options to avoid foreclosure and many banks are failing to disclose this information.
After Hurricane Maria hit the island last September, local banks issued forbearances on payment of mortgages and foreclosures, which ended in December. A forbearance on foreclosure proceedings for FHA-insured loans that guarantee a majority of homes in Puerto Rico, was extended by HUD to August. It was supposed to end this month.
An average of 14 families lose homes every day to foreclosure in Puerto Rico, more than double the rate a decade ago because of the fiscal crisis. Experts say the actual number of foreclosures is much higher because the statistics do not include loans in default or those sold to companies outside Puerto Rico.
Migdalia Colón, head of Quédate con tu Casa, noted that individuals must realize that commercial banks are not willingly providing help because, under the law, homeowners have rights.
“You have the right to have a fair evaluation of your financial situation,” she said.
For instance, an individual who has a Federal Housing Administration (FHA) insured loan has the right to obtain a loan modification if he or she has the ability to repay the loan. If a homeowner is unable to pay the mortgage because he or she lost a job, the bank will foreclose the property.
“If you go to the bank and tell the officials you can no longer pay your house, they will foreclose on your home. To say something different is to induce someone to an error…. You have to be careful about what you say,” she said.
A homeowner who is delinquent on the mortgage has more alternatives to keep a home before the bank decides to pursue foreclosure, something that will generally happen after 90 months of delinquency.
A 2016 law requires banks to provide homeowners with the alternative of loss mitigation before foreclosing. A 2012 law allows homeowners to seek mediation with the creditor to avoid foreclosure but that is only if the property is the homeowner’s main residence.
Homeowners also have protections under federal laws. On Jan. 10, 2014, mortgage servicing rules issued by the Consumer Financial Protection Bureau (CFPB) went into effect. These rules protect borrowers when it comes to foreclosures. In 2017, these rules changed to better protect homeowners.
If a borrower falls behind in payments, a servicer must attempt to contact the borrower to discuss the situation no later than 36 days after the delinquency, and again within 36 days after each subsequent delinquency. The servicer must tell the borrower about loss mitigation options, including loan modification, short sale or any others.
The servicer must assign personnel to help the borrower as soon as the borrower falls 45 days delinquent. The rules restrict “dual tracking,” which is when a servicer simultaneously evaluates a borrower for loss mitigation while also pursuing a foreclosure.
Banks cannot start a foreclosure until a mortgage-loan obligation is more than 120 days delinquent, which provides time for the borrower to submit a loss mitigation application; however, even if a homeowner is more than 120 days delinquent, he or she can still apply for loss mitigation.
The bank can start foreclosure if the homeowner is not eligible for or has rejected any loss mitigation option or has not complied with the terms of loss mitigation. According to federal law, if the bank has already started a foreclosure and receives a borrower’s complete loss mitigation application more than 37 days before a foreclosure sale, the servicer may not move for foreclosure judgment or order of sale.
While a person who is unemployed and unable to pay a mortgage is at risk of foreclosure, the federal Department of Housing & Urban Development (HUD) can provide assistance to unemployed homeowners through the Home Affordable Unemployment Program, Emergency Homeowners Loan Program and an FHA Special Forbearance. The FHA, which guarantees a majority of Puerto Rico’s mortgages, requires loan services to extend the forbearance period for up to 12 months.
Homeowners who have houses guaranteed by the Federal National Mortgage Association, known as Fannie Mae, can obtain a completely new loan to replace the current mortgage; establish a repayment plan to catch up or pay past-due mortgage payments; offer to temporarily reduce or suspend monthly mortgages; and provide a loan modification, which is an agreement to change the original terms of the mortgage—such as the payment amount, length of loan or interest rate.
Mortgages under Freddie Mac, the Federal Home Loan Mortgage Corp., the Veterans Administration and loans guaranteed by the U.S. Department of Agriculture offer the same options as Fannie May. These include forbearance, reinstatements, repayment plans and modifications, including the government’s Home Affordable Modification Program (HAMP). Nonforeclosure solutions, in which the home is forfeited, include short sales or deeds in lieu of foreclosure.
“What a bank evaluates is the capacity of the homeowner to repay long term, and that is through recurrent income…. You could get a forbearance but be careful because if you do not have money to pay, they will take you right to foreclosure,” Colón said.
While the law requires the availability of loss mitigation for delinquent homeowners, in Puerto Rico there are many loans that are not guaranteed by the FHA, Freddie Mac or Fannie May but are guaranteed by “foreign” or other investors.
Often when a person goes to a bank to examine loss mitigation options, the financial entity that owns the loan restricts the available choices to a homebuyer to keep his or her house. This often happens when the bank or insurer sells the mortgage portfolio to a private loan servicer.
Colón says these private loan servicers are often unaware of local laws and many times impose roadblocks on homeowners wanting to keep their homes.
P.R. Financial Institutions Commissioner George Joyner said that while there are local laws that protect homeowners, the loan guarantor (or insurers), is the one that ultimately establishes the policy as to alternatives to avoid a home foreclosure. “If it is a private investor, then the private investor decides based on a contract. What the investor says is subrogated [legally pursuing a third party to recover the amount] by the protections given to people,” Joyner said.
Sources told Caribbean Business that Wells Fargo is one institution that restricts alternatives to foreclosure for distressed homeowners. However, Wells Fargo’s website says otherwise. The webpage says it provides forbearance, repayment, loan modification for delinquent homeowners as well as short sales and deeds in lieu of foreclosure.
Wells Fargo also says it provides alternatives through the Hardest Hit Funds, which was created in 2010 by the U.S. Treasury and allocated $7.6 billion to help homeowners living in states where the financial crisis had the biggest impact. Wells Fargo works with participating states to ensure our mortgage customers have access to mortgage assistance programs that include reinstatement, in which the state provides funds to Wells Fargo to cover the homeowner’s past-due payments. Another option is recast, in which the state helps with past-due payments and contributes to the principal. These states also have funds to make payments to Wells Fargo on behalf of unemployed homeowners and provide assistance to homeowners to move from their home after a short sale or foreclosure.
Joyner said he has not received complaints against banks. He said Wells Fargo is not a major participant in the local market. Early delinquency is at the same levels before Hurricane Maria hit the island. “The most difficult aspect we had was with the FHA because it did not provide a satisfactory mechanism for consumers to repay past-due amounts. The FHA has provided another moratorium, and the expectation is that a $45 million program HUD announced will help homeowners get current on their mortgages, if they were current before the hurricane,” Joyner said.