FHA Extends Mortgage Forbearance to 12 Months

In yet another change to FHA regulations, the administration announced on July 7, 2011 that the minimum forbearance period for unemployed homeowners will be extended to 12 months, effective August 1. Servicers will have 60 days to implement the change.

This adjustment affects only FHA loans, however the administration intends to require all servicers participating in the Making Home Affordable Program to implement the same change.

This FHA Type 1 Special Forbearance is explained in MORTGAGEE LETTER 2002-17, dated August 29, 2002. Under its terms, a homeowner must show proof of unemployment and must be actively seeking a job. The borrower must be an owner occupant, committed to occupy the property as a primary residence during the term of the special forbearance agreement.

However, the borrower is not required to have a long-term commitment to the home. This  special forbearance may be used to reinstate a loan to facilitate the eventual sale.

While all FHA approved servicers are required to participate in FHA’s loss Mitigation Programs and must adhere to the new regulations, this program, like the Making Home Affordable programs, is not without loopholes.

Note that the Mortgagee Letter states that the lender must exercise “good business judgment in determining that the borrower has the capacity to resume full monthly payments, and eventually reinstate the loan under the terms of the plan.”

Even the July 7 announcement states that this extension will be granted to eligible unemployed homeowners, “whenever possible subject to investor and regulator guidance for each mortgage loan.”

In other words, servicers must comply – perhaps.

At the end of the forbearance period, servicers will be required to conduct a review to evaluate the borrower for additional foreclosure assistance programs. If the borrower doesn’t qualify, the servicer must provide the reason why and give the borrower at least 7 days to submit additional information that may reverse the decision.

Forbearance doesn’t equal forgiveness or debt reduction.

During a forbearance period, the homeowner may or may not be expected to make reduced monthly payments. If payments are required and are not made, the agreement will end.

Meanwhile, all those principal, interest, tax and insurance payments that are not being paid in full will be added to the principal balance of the loan. These will be repaid over time when the homeowner is once again working and able to make payments.

The real saving grace is that while interest will accrue, the lender may not assess late fees during the forbearance period, nor may it proceed with a foreclosure. And, since the homeowner is not required to make a long-term commitment to the house, forbearance can give them the necessary time to get the house on the market and sold without threat of an impending foreclosure.


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