More help for jobless homeowners
Freddie Mac is trying to keep more homeowners from going into foreclosure. But forbearance has potential pitfalls.
This post comes from AnnaMaria Andriotis at partner site SmartMoney.
A revamped program launched on Wednesday aims to help keep homeowners who have lost their jobs from going into foreclosure. But experts warn there are drawbacks that could saddle some borrowers with even more debt.
Beginning on Feb. 1, cash-strapped homeowners with a Freddie Mac-backed mortgage who are unemployed could be absolved from paying their mortgage for up to one year while they try to find work. Previously, the company allowed a six-month break for such homeowners, and extended that period only on a case-by-case basis.
Roughly 18% of outstanding mortgages -- or about 10.5 million mortgages -- are owned or serviced by the quasi-government agency, according to Inside Mortgage Finance.
The extension comes as the government is trying to limit the number of homes going into foreclosure. Last week, the Obama administration said it was extending the government's mortgage modification program by an additional year to run through the end of 2013.
Separately, the government is working out a settlement with big banks and state attorneys general that could do more to reduce principal balances on mortgages of struggling homeowners. Experts expect an announcement on this effort soon.
Roughly 4.8 million homes have received a foreclosure notice over the past two years, according to RealtyTrac.
Freddie Mac says the extended relief program can help stave off foreclosure for homeowners grappling with the consequences of joblessness. "We believe this will put more families back on track to successful long-term homeownership," says Tracy Mooney, senior vice president of single-family servicing at Freddie Mac. Post continues below.
There's also a larger benefit, say housing experts: Preventing foreclosures could stabilize home values and help homes that have been lingering on the market sell faster, since there'll be fewer foreclosed homes to buy on the cheap.
Experts agree that the extension could help many borrowers. The average unemployed person has been without work for 41 weeks, according to December data from the Bureau of Labor Statistics. A year of suspended mortgage payments can buy aborrower time to find work before he has to resume paying the mortgage. "Forbearance for unemployed homeowners is a win-win -- these people are in need of immediate assistance," says Susan Wachter, professor of real estate and finance at the University of Pennsylvania's Wharton School.
But these same experts warn that the program has potential pitfalls. When the temporary relief ends, the borrower will have a hefty bill to pay. And borrowers could find themselves in a deeper hole than they were before. Late fees aren't added to the mortgage while it's in forbearance, but interest does accrue, and the unpaid principal that would have been paid during the relief period will be due when it ends.
Freddie Mac says that borrowers who aren't able to catch up on the principal in one lump sum could be offered alternative payment options, like paying it off over time while simultaneously making their regular monthly payments.
If forbearance doesn't work, a loan modification could be an option. Homeowners who are struggling with their payments while they remain employed should consider a loan modification, which results in smaller monthly payments and stretch the loan over a longer period of time than forbearance relief, says Keith Gumbinger, vice president at HSH Associates, a mortgage data firm.
Borrowers who decide to proceed with forbearance will need to meet several qualifications. They'll have to notify the servicer (to whom they send their monthly payments) of their job loss and provide income proof like a pay stub or tax form showing they are or will soon be unable to pay the mortgage. If the unemployed borrower's spouse is working or if the household receives income from other sources that are adequate to pay the home loan, the applicant might not be approved for forbearance.
Further, borrowers who are approved should expect ongoing calls from the mortgage servicer inquiring about their job search; if the company determines the borrower has stopped job hunting, it could choose to end the forbearance program.
More on SmartMoney and MSN Money:
I was laid off with a house payment in 1970. Nobody gave a S**T if I could pay my mortgage.
I ended up giving the house back to the bank and lived with the bad credit until it went away.
WHY DO WE NEED TO SAVE ALL THESE PEOPLE NOW! They got themselves into the mess, let them get themselves out! When did we become a nation of whiny, cry babies who can't take personal responsibility?
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