Mortgage relief for unemployed borrowers

Mar 26, 2010

The Obama administration announced new ways Friday to tackle the foreclosure crisis, in part by requiring lenders to temporarily slash or eliminate monthly mortgage payments for many borrowers who are unemployed.

Washington Post staff writer Renae Merle, and Andrew Jakabovics, Associate Director for Housing and Economics at the Center for American Progress, took questions on the proposal and which borrowers will be eligible for aid.

Thanks for joining us.

 

I am joined by Andrew Jakabovics from the Center for American Progress and we're here to tackle your questions on the Obama administration's new foreclosure prevention initiatives.

Apparently the new plan also includes incentives to underwater borrowers. If my husband and I are in secure jobs and are current on our mortgage, but our house is 30% underwater, will we be eligible? Our mortgage is NOT held by Freddie or Fannie (thus ineligible under Making Homes Affordable). If we are eligible, any specifics on the process? Thank you!

A number of people have asked questions along these lines, so I think this is a good place for me to start. The new FHA refinancing program is designed specifically for borrowers who are current on their mortgage but are under water.  As long as your mortgage servicer is willing to participate in the program (by allowing you to refinance for less than you owe),  and your qualify for an FHA mortgage based on your credit history, etc., then you would be able to get a new FHA loan for 97.75% of the current appraised value of your home. Assuming you have no second lien (2nd mortgage or HELOC), the current lender would retain a small second mortgage so that the total you owe would be 115% of current value.

It will probably take some time to get the program up and running (probably not until the summer), but as I understand it, you would ask your servicer if they will allow a short refinance into FHA.

When are going to see some relief who are upside down, but played by the rules, bought what they could afford, pay their mortgage. All I want to do is refinance for a lower rate so I can save $200/mo.

The program tries to accomplish this through the FHA segment of the program. There borrowers who are underwater can refinance and have their principal balance cut. Of course, the bank or institution that owns your loan would have to agree, but this is an opportunity that didn't exist for a lot of borrowers before.

The government's other refinancing program, HARP, was launched last year, but struggled to make any impact. And it was limited to borrowers with loans backed by Fannie Mae and Freddie Mac, which this program isn't.

Don't plans like this just encourage bad choices? Shouldn't we be worried about moral hazard?

The Obama administration struggled with questions about the "moral hazard" posed by cutting the principal owed by borrowers. I think that is why they were reluctant to do it in the beginning. But as the foreclosure crisis has morphed and a lot of the problem seems to be centered on borrowers who owe more than their home is worth, known as being underwater, their attitude has changed.

I know the administration has grappled with the issue of moral hazard, but I think the way they have laid out the two relief programs work to minimize moral hazard. Under the FHA program, you would need to be current on your loan to qualify, so there's strong disincentive to become delinquent for the purpose of getting help. Under the HAMP addition, you would still need to demonstrate hardship, such as job loss or changing loan terms, to qualify. Delinquency alone doesn't get you a modification.

What will this temporary fix really accomplish? We still have huge numbers of people out of work. Things won't really get better for homeowners until jobs and the economy turn around.

Without question, addressing unemployment is critical to a fair and sustainable recovery. However, when you consider the impact that foreclosures are having on the economy, helping unemployed borrowers by offering a short (3-6 month) payment holiday can be a huge help to them by leaving money in their pockets to meet other needs. Moreover, by preventing unemployed homeowners from losing  their homes, you also protect their neighbors from further declines in house prices. Those declining house prices translate into lost property tax revenues for local governments, further exacerbating problems for municipal budgets and leading to cuts in services and schools (with all the attendant layoffs that follow). It's admittedly a Gordian knot, but if you can prevent foreclosures, you can begin to provide some relief to communities.

As long as any new programs like this one rely on lenders to participate in "good faith" to help borrowers, aren't the programs doomed from the start? Is there consideration from the Obama Administration to draw up guidelines which require lenders to allow underwater homeowners to refinance?

It would be very diffult to require banks to do this and the administration doesn't seem too willing to enter that kind of fight. They are hoping that the incentive payments (money) that they are providing to banks that participate will be enough to get them involved.

While I feel bad for those who can't pay their mortgage, I was responsible during the housing boom and didn't run off to buy something I couldn't afford. By not having these houses repossessed how are we not reinflating the market again? Also, is it not safe to assume that banks are going to be far more reluctant to give me a loan (even with excellent credit) because the government can impose rules that prevent them from getting their money back?

I think it's important to distinguish between reinflating the bubble and preventing an overcorrection in house prices. Banks and servicers who modify loans under HAMP are doing so because the modification has been calculated to be more valuable than proceeding to foreclosure and then having to sell off the home at a steep discount even to current prices, let alone the outstanding mortgage balance. There is nothing in the current program or any of the recent announcements that would force banks to take losses or otherwise be prevented from getting their money back. When foreclosing is more valuable than modifying, banks and servicers will continue to foreclose.

Someone mentioned earlier how difficult it is to refinance if you are underwater and want to secure a lower rate on your mortgage. Here is a story I did with a colleague on this topic.

What reasons would my mortgage servicer NOT want to participate? If this is the case, what options do I have since my home is under water by a significant amount?

Your mortgage servicer may decide that the money being offered in this program is not enough to compensate them for the loss they would incur in writing down your principal balance. And, frankly, they may decide they can recover more if you went into foreclosure.

Another poster mentioned that he was good in not buying more than he could afford during the boom... I would like him to know that the idea that everyone who is underwater is that type of person is wrong. As a 30 year old, many of my friends bought houses in 2005 that were intended to be starter homes, the first home they ever bought and are now underwater. Just about all of us bought townhomes with a two person income and are now very underwater. We were told by everyone to buy and get in because real estate is a great investment. Now all of us are stuck in homes that will not be big enough for us as we begin to start families. I think the assumption that it is our fault is very hurtful when we simply bought at an unlucky time.... my brother who is 7 years older, bought 7 years before me (a starter home) and made a killing when he sold in 2006 and moved out of state. I don't think that you can paint this broad a spectrum of the people in trouble.

Here is feedback from one reader. Thanks for writing in.

We have been trying to get a modification for 13 months now. My husband lost his job nearly 14 months ago. We bought what we could afford on two incomes, but with the loss of his income, have scraped to pay our mortgage and will not be able to do so once his unemployment runs out. The way our bank has strung us along is incredible! They forced us to go delinquent by three months, saying that if we refused to agree to the "moratorium" they would no longer consider us for the program. Then they said "Okay, now do a 'forebearance payment' and pay nearly what you owe each month (a payment just $500 less than the monthly mortgage payment) for three months. After that, we'll consider you for a trial modification." The forebearance payment is still well above 31% of our income, even when you include unemployment. We've reached the end of that period, and supposedly will learn now whether we get a trial modification, and after that, we *might* get the actual modification. We're tired of being made to jump through hoops. Will the new relief make any changes to this?

From what you describe, assuming your mortgage servicer is participating in HAMP, seems to be a clear violation of program participation rules and serves as a good evidence of the need for a robust appeals process. To begin with, you did not need to go delinquent to be considered for HAMP, but many borrowers were given that incorrect information by people working in call centers.  You should have been given a trial modification from the beginning and with three months of on-time payments, should have been offered a permanent modification. The new guidance issued to servicers (PDF) prevents referring you to foreclosure while being considered for a HAMP modification, so at least that should give you time to work out your modification with the bank.

If your servicer is not participating in HAMP, however, none of these rules or protections would apply to you (unfortunately).

I voted for Obama and went along with the bank bailout and supported healthcare reform, but on this issue I think I've reached my limit. At what point will we say that sometimes life just throws you some lemons and you've got to take your lumps? The government's job isn't to protect all of its citizens from everything.

Thanks for your thoughts.

I think administration officials would say that they cannot prevent every foreclosure and aren't trying to. Some people will lose their home even if these programs work as hoped.

But what they are trying to do is keep enough distressed properties off the market to help the housing sector stabilize and help those that can be helped.

What if you do have two mortgages and are underwater? Would you still be able to qualify? We are under by more than 15% on that mortgage alone but about 40% in all.

Yes. You should still be able to qualify for the FHA refinancing program if your first and second lien holder are both willing to write down some of your principal loan balance.

One caveat is that, to date, getting second lienholders to play nice with the first lienholders has been incredibly difficult. As of the end of last week, all four large banks that hold 80% of the second mortgages on their books have signed up to participate in the 2MP program that buys out the second liens for pennies on the dollar.  How that program rolls out, however, is yet to be seen.

What do these foreclosure prevention initiatives mean for properties that are already listed on the market as short sales? And while many of these initiatives sound great for homeowners who are struggling--how will they affect home buyers, namely, those of us dealing with the painstakingly slow process of purchasing short sale properties? Also, will the new incentives that go into effect April 5 really do anything to help?

Here are a couple of stories we have written about short sales and other efforts to help people who can't afford to stay in their home leave without the embarrassment or hassle of a foreclosure.

As part of these new initiatives, the administration is going to offer lenders more money to agree to a short sale. They are hoping this extra cash will fuel more short sales. Also, homeowners will get $3,000 (not just $1,500) to help cover relocation costs.

I am NOT upside down in my mortgage. I owe $225k plus $25k on a second mortgage. My home is still valued at approximately $275k. My wife has been unemployed and collecting 1/3 of her original paycheck. I have not been offered anything to assist us except for six months of deferred payments (50%). What is out there for me to lower my monthly cost? I consider myself one of the responsible borrowers although it has been a struggle this last year.

Have you applied for the government's foreclosure prevention program, HAMP? I don't know the specifics of your financial situation, but it sounds like you might qualify for a loan modification. Under the government's plan, your payments would be lowered to 31 percent of your income.

It sounds like your bank hopes your wife will find a new job soon and then you will be able to resume normal mortgage payments. But if you believe that this is going to be a long term problem, maybe they will be willing to offer a loan modifictation.

Good luck

What does it matter that you're underwater unless you're trying to sell the home? Yes, they bought for more than the house is worth now, but they thought it was a fair price, signed the papers and promised to pay. This seems like letting people have a second bite at the apple of "what's a fair price for this house"? Won't this just cause lenders to increase rates (since now they don't know if the sold price will be the sold price forever)?

Let's say you owe $200,000 on your house and your neighbor's house, which is identical to yours in every way) is on the market for $100,000.  You might come to ask why you're basically continuing to pay twice as much as the person who moves into your neighbor's house. Is it really economically rational for you to keep paying so much more than your neighbor? You could even buy their house and then default on your current mortgage. You'd save a bundle. From the bank's perspective, the risk that you might choose to walk away from your loan is very real. In most cases, the most they can hope to get back is what the house would now sell for, less the costs of going through foreclosure and waiting to find a buyer. In that case, it may make sense for the bank to lower your payments or loan balance to reduce the chance that you will stop paying entirely and walk away.

In general, lenders already price the risk of default into their interest rates (hence, riskier borrowers get higher priced loans). Both HAMP and the FHA short-refi program are designed to help banks and investors minimize losses, not exacerbate them.

I bought in 2006, 30-yr. mtg, put down 20%. never missed a payment, now underwater by half. never took a second or any exotic 'product.' My income has fallen by 60% but I work for myself so no unemployment coming my way. Deeply resent snickering peanut gallery who assume I am getting some aid. Totally stonewalled at refi request - BOA is happy to take 6.125% on a 2006 nut. My high property taxes based on this subsidize the lower (by half) taxes of many neighbors. My high purchase price also enhanced the value of their homes, which is still above water even now. I am burning savings and going under - and getting dissed also??

Whether to and how much help to provide to distressed borrowers is an extremely emotional topic for a lot of people. The Obama administration has struggled with this question, the moral hazard, from the beginning. They have tried to emphasize that their programs will not help investors or people with a beach vacation house. Instead, the programs are focused on people like you who found themselves underwater through no fault of their own.

Hi, Can someone please explain to me why, even if it's not their fault that their house depreciated, people get to stay in houses that they can't afford? I do not own a house because I know that I can't afford it (although with this forgiveness, maybe I should have bought in the boom). If I can't afford to make a payment on my car then I lose it. No one is bailing me out. If you can't afford your house, then you have no right to it.

I am not sure this is really happening. Not everyone who applies, gets a loan modificaton. If the bank thinks you don't make enough to afford your house with the reduced payments, they will move you into foreclosure or a short sale. By the way, under the federal loan modification program, your mortgage payments begin to rise after five  years. So while these efforts provide some relief, I am not sure it's a total give away.

I understand the gentleman who wrote in stating that he was encouraged by everyone to buy in 2005. So was I. But you made your choice. You bought your home, and got all the goodies associated with it. I looked at the same situation, thought the prices were crazy and there had to be something wrong with the market, and stayed out. I don't see why anyone is obligated to help you with your situation. You're an adult, you chose to make a completely optional purchase, you promised to pay the money, that's life. If you bought the house in 2005 and could sell it for double the price in 2010, nobody would be suggesting that you spit your monetary gain with people who held back from buying in 2005. Why should we pay , just because you gambled and lost?

The debate goes on....

Our servicer (Wells Fargo) claims to be participating in the program. When they said we had to do the moratorium, I called the Help for Homeowners hotline, and the person there got on the phone with the bank, and the end result was that yes, we had to agree to the moratorium. I knew it wasn't required by law, but since it was the only way to continue with our application, we were forced into it. I couldn't find any civil or criminal penalties to apply to the bank for making us do something like that, but wonder if there are any?

Wells Fargo does participate in HAMP.

Unfortunately, the way the HAMP contract between servicers and Treasury was drafted, borrowers who are wrongfully denied assistance have no standing to sue for a modification. Moreover,  the penalties in the contract focus on ensuring incentive payments to servicers are not paid for non-compliant modifications. There are no clear penalties for failure to modify eligible loans. (Theoretically, Treasury can withhold payments to the servicers, but if the loans aren't getting modified anyway, there are no payment to withhold.) This has been a huge point of contention for me (along with many housing counselors and consumer advocates) and is incredibly frustrating.

In the mean time, you might try an escalation of your case with the HMP Admin team at Fannie Mae tasked with overseeing the program. See the following: https://www.hmpadmin.com/portal/resources/escalation.html

If you want to track foreclosure prevention efforts, the Washington Post has a special page dedicated to the topic. You can also reach me, Renae Merle, by email. merler@washpost.com. 

 

but the programs don't help. here in Fla. 42% underwater and no-one I know got the re-fi or other aid we see trumpeted in the press. like a hall of mirrored doors, but none open. there is no there, there. the bank would have to sell for less than I am willing to refi but won't. why??

It depends.

If you have a loan backed by Fannie Mae or Freddie Mac there is a federal program, HARP, that might help you. But you have to have a good credit rating etc. to qualify and can't be too underwater.

The new FHA refinancing  program could help. But since it's voluntary, a lot will continue to depend on your lender.

Good luck

That about does it for us.  Thanks for all the questions and Andrew thanks for being here.

Thanks. It's been fun. I hope it's also been informative.

In This Chat
Renae Merle
Renae Merle is a business reporter at the Washington Post. She writes about housing issues and the stock market.
Andrew Jakabovics
Andrew Jakabovics is the Associate Director for Housing and Economics at the Center for American Progress. He works on housing, household debt, and higher education, as well as other issues related to sustaining and growing the middle class.
Recent Chats
  • Next: