MBA Proposes Forbearance for Unemployed Borrowers

The Mortgage Bankers Association (MBA) has proposed a new toolrnfor the Home Affordable Modification Program (HAMP) to specifically address thernproblems of unemployed borrowers. 

ThernUnemployed Borrower Bridge to HAMP Modification was laid out by MBA PresidentrnJohn A. Courson in a letter to Treasury Secretary Timothy F. Geithner andrnproposes up to nine months of forbearance for unemployed owner-occupants beforernthey are considered for a HAMP loan restructuring.

In addition to forbearance, MBA's proposal calls forrnestablishing a Low Cost Advancing Vehicle (LCAV) within Treasury to supplyrnreasonable funds at a fixed rate to participating mortgage servicers to coverrnadvances during the forbearance period. rnIt also suggests a risk sharing mechanism that would encouragernstakeholders to take the greater risk of loss from postponing or stopping foreclosurernby paying a portion of lost value of the home to the investor, similar to thernhome price decline program.

The MBA's proposal is in response to an increase in thernnumbers of unemployed and a corresponding increase in the number of seriouslyrndelinquent mortgage loans and foreclosures. rnThe January HAMP report named loss of income as the reason for over 57.4rnpercent of HAMP modifications and the U.S. Bureau of Labor Statistics hasrnreported that the average unemployed U.S. worker was out of work for six tornseven months in 2009.

Courson points out in his letter that, while unemployment isrna serious challenge for many American's right now, “it is usually arntemporary condition where the worker is actively searching for a job andrnwilling to work.” 

The Bridge program would allow an unemployed borrower tornenter into a forbearance plan for the first of three possible 90 day phases.  During the first phase borrowers would bernevaluated for their ability to make payments at 31 percent of household income.  If that calculation results in a paymentrnunder $300, no payment would be required during the first phase.

In the second phase and third phases all borrowers includingrnthose below the threshold, must make payments and the borrower must pass a netrnpresent value (NPV) test in the second phase. rnIf at any time during the process the borrower becomes employed, then hernwill be evaluated for a regular HAMP loan modification. Borrowers would bernreevaluated as to employment and income status at the end of each phase forrnpossible total of nine months of forbearance. rnThe entire plan, however, apparently hinges on borrowers having unemploymentrncompensation available to them and nine months worth available in order tornmerit the full nine months of forbearance. During forbearance, no late feesrnwould be permitted nor could a foreclosure sale take place.  Foreclosure costs and fees could berncapitalized in the modification.

The NPV would be calculated using 31 percent of the presumedrnhousehold income which would be based on assuming the new employment would be atrn75 percent of the previous salary. The P&I portion of that 31 percentrn(eliminating taxes, insurance, HOA fees) would be determined and then therninterest rate that would achieve that payment. rnIf the rate calculated is equal to or greater than the rate below, thernservicer would extend forbearance, if not the forbearance period would end.

               LTV                           Rate

            Below 90                     Forbearance should not bernextended

            90-94                           3%

            95-99                           2.5%

            100+                            2%

Most borrowers would be eligible for HAMP modifications atrnthe end of the forbearance period provided they meet the other HAMP eligibilityrncriteria.  However, under MBA's plan, ifrnthe borrower's new income results in a debt-to-income ratio less than 31rnpercent the servicer could either enter into a repayment plan or modify thernmortgage without reduction of interest rate.

Courson said that the best result would be that a nine-monthrnforbearance plan would not be considered a troubled debt restructuring (TDR)rnbecause partial payments would be made during the period and thus there wouldrnbe no significant loss of cash flow.  Ifrnsuch plans result in TDRs the issue becomes how that is treated under generallyrnaccepted accounting practices.  Requiringrnamortizing payments during forbearance “would demonstrate that the loan isrnnot collateral dependent, thus providing a reasonable basis to measure thesernloans using a discounted present value of expected cash flows rather than therncollateral value.”  He said that thernissue is being debated by the Office of Comptroller of the Currency but unlessrnfavorable accounting treatment is allowed and appropriate lending facilitiesrnare offered (LCAV) the program must be voluntary and flexible.

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