Do Mortgage Companies Have To Wait 120 Days To Foreclose?

If you’re a few days late on your mortgage payment, you may wonder if your home can go into foreclosure. As a general rule, your mortgage company can't foreclose unless you’re more than 120 days delinquent on payments for your principal residence. This article will cover the 120-day rule, when it doesn't apply, and certain actions the servicer must take during the 120 days. Finally, the article will look at some temporary COVID-related regulations that can extend the no-foreclosure period longer than 120 days.

What Is the 120-Day Rule?

The 120-day rule is part of Regulation X and is overseen by the Consumer Financial Protection Bureau (CFPB). The CFPB’s authority was granted under the Dodd-Frank Act and the Real Estate Settlements Procedures Act (RESPA). The rule says the first notice or first filing under a state's foreclosure law can't occur until you're more than 120 days delinquent.

Your delinquency begins on the first day your mortgage payment is due and not paid. For example, if your mortgage payment is due on May 1, 2021, and you didn't pay it, your delinquency begins on May 2, 2021. By law, your mortgage company will have to wait until 120 days have passed, starting on May 2, to bring a foreclosure action. This means the servicer will have to wait until August 31, 2021, since the mortgage must be more than 120 days delinquent.

Judicial vs. Nonjudicial Foreclosures

The 120-day rule doesn't change based on whether the foreclosure is a judicial foreclosure or a nonjudicial foreclosure. That is, whether the foreclosure must go through the court system or can happen without court oversight. The 120-day rule also applies to non-payment-related breaches, not just when a homeowner fails to make a mortgage payment. For example, if you're required to pay your home insurance into escrow and you fail to do so, the mortgage company may start the foreclosure process 121 days after the missed escrow payment.

Loss Mitigation

If a delinquent borrower submits a loss mitigation application during the 120-day period, there can't be a foreclosure referral unless:

• The servicer has sent the borrower a notice that they're not eligible for the loss mitigation option they applied for, and the 14 days for the borrower to appeal has expired without the borrower filing an appeal.

• The borrower has rejected all loss mitigation offers.

• The borrower fails to perform as required under a loss mitigation plan.

If the 120 days have expired and the servicer has already started foreclosure proceedings, foreclosure can still be avoided if you file a complete loss mitigation application more than 37 days before the foreclosure sale. The servicer must reply to your application, and if you’re given options, you have seven days to decide if you want to accept or decline the servicer's offer. If you decline the offer, the foreclosure sale can go forward.

Mortgage Loan Types

The 120-day rule applies to all federally related loans. Many COVID relief programs only apply to federally backed mortgages. Federally backed loans include mortgage loans such as mortgages backed by the FHA, VA, USDA, Fannie Mae, and Freddie Mac. Since the 120-day rule is part of RESPA, it applies to almost every borrower's mortgage loan. RESPA applies to any loans from institutions insured by the FDIC.

Small Servicers

The 120-day rule falls under the loss mitigation requirements in the regulations. There's an exception to many of the loss mitigation requirements for small servicers. These are servicers that service 5,000 or fewer mortgage loans. Reverse mortgage creditors are also exempt from following most lost mitigation rules. Yet, these small servicers and reverse mortgage lenders do have to follow the 120-day rule. Servicers are also required not to foreclose if the borrower is performing as required under a loss mitigation agreement.

How do you know if your mortgage servicer is a small servicer? First, if your servicer is a household name like Wells Fargo, it's not a small servicer. If your servicer isn't a household name, you may want to contact a HUD-approved housing counselor or foreclosure attorney to determine if your mortgage servicer is covered by loss mitigation rules like the early intervention rules.

Exceptions

The only exceptions to the 120-day rule are:

• The loan was a temporary loan such as a construction loan.

• The home isn't in a 1-4 unit family dwelling.

• The home isn't in a state or territory of the United States.

• The foreclosure is because of a due on sale clause in the mortgage contract. Selling the property to another party without the lender agreeing the buyer can assume the loan can trigger a due on sale clause.

Other Requirements During the 120 Days

What's the point of requiring mortgage servicers not to foreclose until you're 120 days delinquent? The idea is you need this time to figure out what to do to avoid foreclosure. That's what the early intervention requirements are for. 

Your mortgage servicer must contact you, either by telephone or in-person, to discuss your options by the 36th day of delinquency. They have to make a good-faith effort at live contacts within 36 days of each payment due date as long as you're delinquent. They must also send a written notification by the 45th day of delinquency. These live and written notices are to make sure you're aware of your loss mitigation options. Small servicers and reverse mortgage servicers are exempt from these early intervention requirements.

Your loss mitigation options may include loan modification, mortgage forbearance, a short sale, or a deed in lieu of foreclosure. With a loan modification, you may be able to reduce your principal, extend the term of the loan, lower your interest rate, or make up your missed payments at the end of your repayment schedule.

Within 45 days of each payment due date, while you're in delinquency, the servicer must send you a written notice of your loss mitigation options. But, the servicer doesn't have to provide this notice more than once during a 180-day period. The written notice must include the following:

• Encouragement for you to contact the servicer,

• The telephone number and the mailing address for its loss mitigation personnel,

• A statement about possible loss mitigation options that may help you,

• Loss mitigation applications or statements on how to get more information on the loss mitigation options, and

• The website for the list of CFPB homeownership counselors or HUD homeownership counselors and the HUD phone number to access homeownership counselors.

Consider this example:

Your mortgage has been delinquent as of May 2. By June 7, your mortgage servicer must make live contact with you to discuss your loss mitigation options. By June 16, the servicer must send you a written notice of your loss mitigation options. If you fail to make your payment that's due on June 1, your mortgage servicer will have to make live contact with you again by July 8. July 17 would be 45 days after missing the June 1 payment due date, but the lender doesn't have to send this written notice because it already sent one written notice — the June 16 notice — within the past 180 days.  

On August 31, the 120 days have expired and the mortgage company starts foreclosure proceedings. The foreclosure sale date is set for October 31. You file a complete loss mitigation application on September 20. That's more than 37 days before the foreclosure sale date so the mortgage company has to consider it. On October 23, the mortgage company accepts your loan modification proposal for loss mitigation. 

Temporary Rules for COVID Relief (Effective August 31, 2021)

It took the CFPB many months to arrive at its final rules for COVID-19-related hardship relief. As a result of the final rules, the 120-day rule can be much longer. Some of these mortgage servicing rules expire on December 31, 2021, and the rest expire on October 1, 2022. The new rules that expire after December 31, 2021, are the ones that provide temporary procedural safeguards prior to foreclosure. The final rules that expire on October 1, 2022, provide streamlined loss mitigation evaluation rules for servicers. The live contact message required by the 36th day must include some special information.

Unlike COVID-19 pandemic relief legislation such as the CARES Act and the American Rescue Plan, these procedural safeguards don't apply only to government-backed mortgages. These mortgage servicing rules are as broad as RESPA. This means they apply to all government-related loans, including any loan from an FDIC-insured institution. 

No Foreclosure Even After 120 Days

These procedural safeguards don't apply if:

• You were more than 120 days delinquent before March 1, 2020, or

• An applicable statute of limitation will expire before January 1, 2022.

If neither of those exceptions applies, there can be no foreclosure until January 1, 2022, unless

1. There has been a complete loss mitigation evaluation.

2. You have abandoned the property within the meaning of abandonment under local law.

3. You have been unresponsive for at least 90 days prior to the first notice or filing for the foreclosure and several other conditions are met.

All of the following conditions must be met for Item 3 above to apply:

• The servicer made a good faith effort to establish live contact after each missed payment. 

• The servicer sent the written notice that's usually required within 45 days when in delinquency, at least 10 days before the first notice or filing of foreclosure, and no more than 45 days before the first notice or filing of foreclosure. This means, even if this notice has been sent once within the last 180 days, it would need to be sent again to comply with these temporary regulations.

• The servicer sent all notices required to be sent during the 90 day period before the first filing or notice of foreclosure.

• The borrower's forbearance program must have ended at least 30 days before the first foreclosure steps are taken.

The good faith requirement for attempting to establish live contact with the borrower isn't met by a written request to contact the servicer on the periodic statement unless the written request on the periodic statement is after six or more consecutive missed payments.

Let’s Summarize…

A mortgage servicer can’t foreclose until more than 120 days have passed since you first fell behind on your mortgage payments. During that 120-day period, they need to take specific steps to make you aware of your available loss mitigation options. These options might include loan modification, forbearances, short sales, deeds in lieu of foreclosure, or a repayment plan to catch up the amount you’re behind on the mortgage. 

If you weren’t 120 days delinquent before March of 2020, you’ll be subject to the CFPB’s temporary rules that will bar foreclosures in most cases until 2022. Due to foreclosure moratoriums enacted as part of pandemic relief acts plus the new CFPB rules, your 120-day period might extend up to two years.