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FHA eases mortgage rules for unemployed borrowers

by Peter G. Miller
July 12th, 2011

Unemployment just won’t go away.

The latest numbers point to an “official” unemployment rate of 9.2 percent and paltry jobs growth–just 18,000 new jobs in June.

That’s 14.1 million people without a job, not counting that 2.7 million individuals who were “marginally attached” to the labor force.

Now the FHA has decided to do something useful to help the unemployed. It has established an unemployment forbearance program for those FHA borrowers who have lost their jobs.

This is going to be a good deal for several reasons: First, it will help people with real needs, and second, it will set an example the private sector can follow.

How the unemployment forbearance program works

For more than a decade the FHA has had programs available to help the unemployed. Under a 2002 rule, unemployed borrowers could get as much as four months of forbearance. Now, under the new standard which begins August 1st, FHA borrowers can have as much as a year of missed payments before facing a foreclosure.

HUD says under the new system that lenders no longer need to verify “that the mortgagor has a good payment record and stable employment history.” What else could the new rules possibly say given that the borrower is not making payments and has lost

a job?

The new program will not be available to all unemployed borrowers. HUD says there are several situations where foreclosures can begin immediately or the forbearance program will end:

  1. The borrower abandons the property.
  2. The borrower tells the lender that he or she will no longer seek employment.
  3. The borrower tells the lender that he or she will not honor the terms of the forbearance agreement.
  4. The borrower allows forbearance payments to become 60 days past due and unpaid.
  5. The borrower finds a job and the loan is reinstated.

Running the numbers

The obvious goal is to help people reach option number four, to give them time to get a replacement job and again make their mortgage payments, stop a foreclosure, and help lenders avoid losses.

However, buried in the fine print is a different issue: The new FHA plan will prevent a number of additional foreclosures. How many additional foreclosures is unknown, but the impact could be significant.

Why?

By keeping foreclosures off the market HUD is reducing the pressure to lower home prices. In effect, it’s holding down the inventory of distressed properties.

This is very good news and a smart policy option. Politically, the new FHA guidelines make the housing market look better than might otherwise be the case.

No less important, there will be cases where borrowers miss a few payments and then find a new job. Borrowers, servicers and lenders can then work together to continue the loan, perhaps through a modification where the mortgage term is increased by adding the missed payments to the end of the loan.

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