Two new mortgage options give unemployed a big breakby Peter Miller
While the FHA has had a concrete forbearance program in place for some time, last Friday Freddie Mac announced that servicers now “must” assist borrowers who are suffering financial hardships due to their unemployment. Furthermore, Freddie’s program can be extended for as long as one year.
The FHA’s program
In the case the FHA, a 2002 “reminder” from HUD told lenders that borrowers could actually miss FHA loan payments and not be foreclosed, but only under certain conditions.
The purpose of “special forbearance,” said HUD, was to “provide relief to otherwise creditworthy borrowers who have become unemployed and have a reasonable prospect of re-employment in the foreseeable future.” Borrowers who qualified–meaning those with a good payment record and otherwise stable employment history–might be able to get reduced payments, and in some cases, even suspended payments.
Once employment restarts, the borrower will then have to repay the “arrearage” over time. In effect, the usual amortization schedule will be modified to accommodate the borrower.
The 2002 notice said that the special forbearance had to last at least four months. Yet in 2011, HUD changed the rules in two important ways:
First: Lenders would no longer have to verify that the borrower had a good payment record and stable employment history.
Second: The minimum forbearance period was increased from four months to 12 months.
Given high levels of unemployment–13.1 million people were officially unemployed in December, while 2.5 million more were described as “marginally attached” to the workforce–special forbearance has the potential to help large numbers of FHA borrowers. In addition, it also helps insurance plans such as the FHA since a borrower with forbearance has not been foreclosed, thus reducing program claims. In fact, with a new job it’s possible that the borrower will never be foreclosed.
Freddie Mac’s improved program
Freddie Mac recently introduced “a new forbearance relief option that Servicers must use to assist Borrowers who are experiencing a financial hardship due to unemployment.”
Previously, Freddie Mac had asked lenders to “consider” unemployment relief. This represents a big change, given that the new program is now a “must.”
“If a Borrower has a hardship due to unemployment, the Servicer must first consider the Borrower for short-term unemployment forbearance relief prior to pursuing other alternatives to foreclosure,” said Freddie Mac in a news bulletin last week.
In the past, Freddie Mac had allowed servicers to grant up to three months of forbearance without monthly payments and without Freddie Mac approval. With Freddie Mac approval, the forbearance period could be extended to six months.
Under the new plan, Freddie Mac says that mortgage servicers–the companies that collect monthly mortgage payments for lenders and foreclose if necessary–can:
- Approve unemployed borrowers with Freddie Mac loans for six months of forbearance without prior approval from Freddie Mac.
- Extend the forbearance period to a full year with Freddie Mac approval.
The expanded Freddie Mac forbearance options take effect Feb. 1. In addition, because both Freddie Mac and Fannie Mae are operated by a single federal regulator, look for Fannie Mae to also adopt a special forbearance program for the unemployed.