Mortgage Bankers Want to Help Unemployed Keep Their Homes

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A bunch of stiff-suited bankers may be the last group you'd expect to launch a proposal that aims to give the unemployed a bit of mortgage breathing room.

Well, surprise, surprise! The Mortgage Bankers Association has offered up a voluntary forbearance program for home owners who have lost jobs and cannot make mortgage payments. The group's motive for cooking up the proposal, presented recently to federal authorities, says a lot about the state of our economy.

As the bankers see it, the driving force behind foreclosures and delinquencies has shifted from adjustable rate re-sets to homeowners having less income due to job losses. In other words, it's the people out of work who are now losing their homes. With the nation's overall unemployment rate at 9.7 percent -- higher in some states, such as California -- 14.8 million Americans are now without jobs. Of those, 6.3 million have been without work for six months or longer, which makes it awfully hard to make a house payment.

The administration's loan modification program, known as HAMP, can't help households without a source of income, says Josh Denney, Associate Vice President of Public Policy for the MBA, which represents independent mortgage bankers and big banks who service loans.

And so, on February 18, the MBA met with folks from Treasury, Housing and Urban Development and the White House to pitch their plan to help homeowners with less -- or no -- income. Under the program, unemployed borrowers would be eligible for up to 9 months of forbearance. If, during that time, they get a job, they would be eligible for a loan modification. When that loan is modified, the amount of the forbearance (what the borrower didn't pay while unemployed) would be added back in and the loan re-amortized into a new 30-year loan. Alternatively, the missed payments could be added onto the existing loan balance. In that case, the borrower would either pay a little more each month or pay off the extra at the back end of the loan.

No free rides here, for sure. But no fees, either. Foreclosure costs and any fees incurred prior to the program would be added back into the mortgage during the modification. The home cannot be foreclosed on during the program, which would apply to all Fannie Mae/Freddie Mac loans, and would be optional to the private mortgage market.

To qualify, the homeowner must provide proof to the loan servicer that they have lost their job and sign an affidavit. A nine-month grace period follows, in which the mortgagee makes a reduced payment of 31 percent of household income, based on unemployment compensation or a spouse's income. If the income is less than $300 a month, the homeowner makes no mortgage payment at all. A mortgage servicer checks on the borrower every three months to verify employment status.

What if a borrower does not get a job in those nine months? At that point, the home can be sold as a short sale (less than the mortgage balance owed if the lenders agree) or put on the market to sell. What this program does is give the borrower breathing room during unemployment without cost to the government, since the cost of the forbearance is tacked onto the end of the loan and ultimately covered by the homeowner himself.

Treasury officials are currently considering the proposal. One obstacle may be mortgage investors, who may prefer a modification to nine months of uncertainty associated with a forbearance. But in these times, something is definitely better than nothing.
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