If you or someone you know has lost a job and are in danger of falling behind on mortgage payments, here’s some potentially important news: The two largest players in home mortgages, Fannie Mae and Freddie Mac, are revising their policies on forbearance when unemployment interferes with a borrower’s ability to stay current on a loan.
Forbearance is a process in which a lender or mortgage servicing company suspends — that is, cuts to zero — or reduces required monthly payments for a specific length of time. On loans they own or have securitized, Fannie and Freddie are now directing servicers to forbear when a borrower can show the loss of a job.
Unlike the companies’ earlier rules, servicers can grant half a year of reduced or suspended payments without getting special permission in advance. If unemployment continues beyond six months and if the servicer believes granting forbearance for up to another six months would be appropriate, it can ask Fannie or Freddie for approval to do so. During any unemployment forbearance period under the rule revision, borrowers will not be subject to foreclosure, even if they had fallen behind on payments before the forbearance began.
Fannie Mae’s policy becomes mandatory for all loan servicers on March 1. Freddie Mac’s policy takes effect Feb. 1. Though no estimates were available on how many borrowers could be assisted under the new guidelines, the numbers nationwide are likely to be substantial at a time when the unemployment rate is at 8.5 percent.
Forbearance, it should be noted, does not mean a forgiveness or reduction of the principal balance on the mortgage. Think of it instead as a timeout. Whatever amounts go uncollected during the forbearance period must eventually be repaid.
Say, for instance, that you owe $2,000 a month on your loan. Suddenly you lose your job and that payment becomes impossible. An unemployment forbearance agreement might allow you to suspend all payments on the mortgage while you search for a new job. Or, if your spouse still has a job and you can afford it, your monthly payment might be reduced to $1,000.
If your job search ultimately took four months, you would owe $4,000 under the reduction plan or $8,000 under the suspension plan at the end of the forbearance period. You’d be expected to resume your regular $2,000 payments and work out an arrangement with your servicer to repay the deferred amounts in affordable increments. If this happened to be $500 extra a month, your repayment would take eight months on the reduction plan, 16 months on the suspension.
Not everybody owning a home with a Fannie or Freddie mortgage will be eligible for the expanded job-loss relief. To begin with, the house will need to be a principal residence, not a second home or investment property. Fannie’s guidance to servicers specifically rules out assistance when the home was financed with an FHA, VA or Rural Housing mortgage. Most important, there must be a documented “financial hardship” caused by the employment loss, and there must be a reasonable chance that without forbearance, the borrowers could sink into default and eventually lose the house.
In cases where an extension of an existing forbearance plan is being considered, borrowers will also have to document that they don’t have cash reserves — bank accounts or other liquid assets — that exceed 12 months’ worth of their monthly housing expenses. In other words, if you’ve got money socked away that you could use to pay the mortgage, don’t expect another forbearance. Also under Fannie’s rules, borrowers’ monthly housing expenses must be more than 31 percent of their monthly income, excluding unemployment benefits. Put another way: Only borrowers whose mortgage bills are consuming an inordinate amount of their total household budget need apply.
Tracy Mooney, Freddie Mac’s senior vice president for single family servicing, said the purpose of the expanded forbearance is to “provide families facing prolonged periods of unemployment with a greater measure of security by giving them more time to find new [jobs] and resolve their delinquencies.”
How do you get a pause on your mortgage payments? The first step is to communicate with your servicer as soon as you learn of your job loss. Don’t wait until you fall behind on a payment. Ask the servicer whether Fannie or Freddie owns or has guaranteed your mortgage, then walk through the rules and numbers: Are we eligible for a forbearance plan? How much can we afford to pay, and how much will be deferred? What alternatives may be available, such as a loan modification?
Check it out. It just might help save your house.
Ken Harney’s e-mail address is email@example.com.