What is the best foreclosure relief option for unemployed and underwater homeowners?
- Short sale (30%, 64 Votes)
- Principal reduction or cramdown (29%, 63 Votes)
- Strategic default (17%, 37 Votes)
- Payment forbearance (12%, 26 Votes)
- Loan modification (11%, 24 Votes)
Total Voters: 214
Extend and pretend is alive and well: unemployed homeowners with mortgages owned by Freddie Mac and Fannie Mae (Frannie) now have the option of participating in a mortgage forbearance program. The revised policy took effect February 1, 2012 for Freddie Mac and will take place March 1, 2012 for Fannie Mae.
Not all homeowners with a mortgage from Frannie – 60% of homeowners in California – who experience job loss will be eligible for Frannie’s forbearance program. To qualify:
- the property must be the homeowner’s principal residence – second homes or investment property will not be considered;
- financial hardship caused by employment loss must be documented and reasonably demonstrate forbearance will save the homeowner from default and foreclosure;
- the homeowner must show he does not have cash reserves in bank accounts or liquid assets which exceed 12 months’ worth of household expenses;
- household expenses must be more than 31% of the household monthly gross income, excluding unemployment benefits; and
- the home must not be financed with an Federal Housing Administration (FHA)-insured, Veterans Affairs (VA)-insured or Rural Housing mortgage. [For more information on how unemployed homeowners may qualify for the program, see the Freddie Mac report Unemployment Forbearance and the Fannie Mae report Introduction of Fannie Mae Unemployment Forbearance.]
As the idea of Frannie’s forbearance goes, an unemployed homeowner may be granted up to 12 months in deferment of his mortgage payments, during which time he may look for and obtain employment. Once he does obtain employment, he will work out a payment plan with his mortgage servicer in order to get back on track with his payments and make up for the payments deferred. The lender adds the interest to the principal and the owner gets a free ride for 12 months.
Frannie expects the forbearance option will allow unemployed families to remain in their homes as well as alleviate overcrowding in the housing market caused by real estate owned (REO) inventory. Private lenders BofA, GMAC Mortgage and Wells Fargo have indicated they are either in the process of reviewing or will assess mortgage forbearance options.
first tuesday take: Frankly Frannie, forbearance is a cute gesture, but what unemployed homeowners who are the worst off need is principal forgiveness to adjust for the pricing crisis solely brought on by lenders, not homeowners.
If REO inventory crowding was the perceived problem, then REO lenders need only drop the high prices they seek for the REOs now in the multiple listing service (MLS) and voilà, buyer demand will instantly kick in and the inventory will vanish. Basically, but we are talking politics here, not basics.
The proposed forbearance program will only help a very small pool of homeowners. The homeowners the program will not help – and who unfortunately need the most help – include:
- Homeowners with negative equity: If an unemployed homeowner is frantically dog paddling in his underwater mortgage, forbearance is not going to fish him out of his taxing struggle to stay afloat. Forbearance will only extend the period of time in which he has to carry the weight of the mortgage – it temporarily avoids the impending doom. [For more information on the effect of negative equity for a homeowner and the household, see the February 2011 first tuesday article, The negative equity plague: California’s home insolvency crisis]; and
- Homeowners in a tough job market: Forbearance is a gamble on the part of an unemployed homeowner when the supply of paying jobs is way less than stellar (though his bet will get him additional unemployment benefits of payment-free shelter for one year). Finding new or more employment is not impossible but the job market is not exactly something a smart person would place their bets on – especially in California. Unemployment here is at 11% and a full recovery to the peak employment levels of 2007 is not due until 2015. To make matters more difficult, job demand rises even more at around 18,000 monthly since the population increases at roughly 33,000 per month – it’s like a slow runner trying to keep up with the pace of a race getting faster and faster. [For more information on the forecast for jobs in California, see the first tuesday Market Chart, Reeling from California’s lack of jobs].
Though a jobless homeowner with negative equity in a tough job market could potentially qualify for mortgage forbearance under Frannie’s guidelines, in the end, the underwater and unemployed need not even consider the option. Forbearance provides them no permanent relief from foreclosure. Instead it only delays foreclosure – an underwater and unemployed homeowner’s extended jailhouse sentence to a black hole asset. [For more information on the negative effects of house lockdown, see the January 2011 first tuesday article, Migratory lockdown: underwater homeowners confined.]
If Frannie really wanted to help these homeowners do the “right thing,” they would authorize principal reductions so homes could be sold since the jobless homeowners are no longer qualified to own them. But apparently the Federal Housing Finance Agency (FHFA) has declared an official “no” to cramdowns for Frannie, according to the most recent FHFA report. [For more information on Frannie’s stance on principal reduction, see the November 2011 first tuesday article, Surprise: Frannie says “no thank you” to cramdowns.]
Frannie proclaims its mission is to come to the aid of unemployed homeowners and their families. But the forbearance plan doesn’t do this. Frannie’s thinking – driven by politics – is not motivated by what foreclosure will do to individual homeowners. It’s driven by the fear of what widespread foreclosures might do to neighborhoods. Granted, this is a worthy concern, but in the end, forbearance for the underwater and unemployed is:
- of no benefit to the community since the homeowner will have no time or money to invest in the community, let alone set money aside for the family, while he is busy working years just to pay a negative equity mortgage at twice what rent would be; and
- disadvantageous for the homeowner since it prevents him from moving on to a better job location, which is the primary reason he has no job; and
- an improper lending practice since it keeps a delinquent mortgage uncleared on the lender’s balance sheet at likely double the fair market value (FMV).
RE: “Fannie Mae, Freddie Mac revise policies on mortgage forbearance “ from the LA Times and “Unemployed mortgage holders get payment extensions” from the NY Times
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as always great content and astute commentary…dlb
Homeowners who invested large down payments of 60% ($140K) or more as I did, should be able to get the cramdown and be forgiven on my loan. I worked very hard to save up to put a roof over my family. I am already mid age and should not have to be struggling the way I am now. Therefore, the bank needs to just sign the deeds over to homeowners who have invested as I did (THAT MEANS YOU – WELLS FARGO/FREDDIE MAC). I agree that those people who bought into loans with no down payments or adjustable rates that eventually come due raising their payments to double and in some cases triple, probably could not afford to have that home in the first place and the loan officer MADE IT EASY and just inticed them into the loan for a commission and knew they would end up loosing the home or coming back for another refinance to once again earn another commission. Afterall, the bank runs your credit and they diffinately know the history and whether a person is a going to be a risk loan in the long run but they did it anyway. SHAME ON THEM!!! Obviously, these lenders didn’t pay attention to CODE OF ETHICS..right?
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Lenders are not solely to blame for the situation. Greedy homeowners jumping on the bubble bandwagon are at least, if not more, to blame. Once on, many of these people sucked out large amounts of UNEARNED, tax free money as bigger fools jumped on further jacking up the prices while they all smugly sat back and congratulated themselves on their investment acumen. This is in addition to enjoying the other fruits of ownership including distorted tax benefits which were effectively subsidized by all taxpayers.
Meanwhile anyone with any sense was FORCED OUT of the market and PREVENTED from home ownership. Now, instead of being able to benefit from a proper market correction, these people must still pay inflated (albeit lower) prices and higher taxes as well as having to deal with severely limited (and needlessly expensive) financing options.
Underwater homeowners should either swim (walk) away from their bad investment or stupidly keep drowning by paying their friendly banks’ mortgages. If they cut their losses by swimming away, there would be an actual market correction as the criminally responsible banks go belly up and their assets get liquidated.
The LAST thing that should happen is that the taxpayers should PAY MORE by throwing life preservers (subsidies of any kind) to either the homeowners or the banks in order to keep the market artificially inflated for the exclusive benefit of people who have already and UNDESERVEDLY benefited.
It should also be noted that a proper market correction would probably also lower RENTS since all housing costs could be expected to decline.
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I change my vote to short sale. I misread “and” to be “or”, totally different question.
disadvantageous for the homeowner since it prevents him from moving on to a better job location, which is the primary reason he has no job
So you propose that a mortgage forbearance program is not enough because all it does is force the bank to give the homeowner a free ride for a year. You want the banks to additionally provide “principal forgiveness to adjust for the pricing crisis solely brought on by lenders, not homeowners”. In other words, a payment-free loan isn’t good enough; the banks should be forced to give their money away. Instead of just sticking it to the bank’s shareholders, why don’t you just nationalize the banks and stick it to all the taxpayers?
P.S. Before you exhonerate the delinquent homeowner and blame the banks “solely” , you should examine (a) Congress’s failure to enforce existing regulations (b) Congress extorting the banks to provide bad loans (c) Fannie & Freddie’s executives corruption and collusion with the responsible Congressional members (d) Regulations that perpetuated the monopoly of the three credit rating organizations that provided the corrupt ratings that deceived Wall Street and caused the crash.
Don’t simply drink the media Kool Aid – do a little investigative reporting and get the facts before pontificating. After all, isn’t that your job?