Unemployed owners get FHA foreclosure reprieve

Unemployed homeowners with FHA loans can get an extended reprieve from potential foreclosure under new federal rules.

Mortgage lenders will extend what’s known as the “forbearance period” to 12 months, up from the current provision of four months.

“The current unemployment forbearance programs have mandatory periods that are inadequate for the majority of unemployed borrowers,” said Shaun Donovan, U.S. Housing and Urban Development Secretary.

Forbearance, or “holding back,” is a special agreement between the lender and the borrower to delay a foreclosure. During this period, loan payments usually are reduced or postponed.

By extending the delay period before foreclosure proceedings start, the government hopes to give out-of-work borrowers who meet eligibility requirements more time to find a new job and resume mortgage payments (possibly under modified terms), thereby stopping a foreclosure and helping lenders avoid losses.

An estimated 14.1 million people nationwide are without a job, with an additional 2.7 million individuals believed to be “marginally attached” to the labor force, according to recent unemployment reports. Across the country, 60 percent of unemployed people have been out of work for more than three months and 45 percent have been out of work for more than six months.

Under the new system HUD says lenders will no longer need to verify “that the mortgagor has a good payment record and stable employment history.”

The new program will not be available to all unemployed borrowers. Foreclosures can begin immediately or the forbearance program will end under several situations, including:

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.

Along with the adjusted forbearance period, the federal government has set aside at least $8.6 billion in the last year and a half for homeowners who have lost their jobs. That includes the $7.6 billion Hardest Hit Fund and the $1 billion Emergency Homeowner Loan Program, which offers support to 32 states around the country where home price declines and unemployment were the steepest.

In the Emergency Homeowner Loan Program, homeowners can receive interest-free, forgivable loans, which pay a portion of their monthly mortgages for up to two years, or up to $50,000. The program is expected to help as many as 30,000 distressed borrowers across the country, with an average loan amount of about $35,000.

By keeping foreclosures off the market HUD believes it is reducing the pressure to lower home prices and essentially holding down the inventory of distressed properties.