As the Obama administration expanded its loan modification program last year, many on Long Island waited to see if help would arrive for the growing ranks of people who lost jobs.
No such luck. The big problem was that if a borrower didn’t have income, no amount of loan modification would work if the borrower can’t pay in the foreseeable future.
Now, the Mortgage Bankers Association has pitched a “forbearance” proposal that needs White House approval. Forbearance is when the lender or investor-owner of the loan agrees to hold off on foreclosure and the borrower makes no or reduced payments for a period, with the difference being paid off later or when the house is sold.
Under the trade group’s proposal, lenders and loan investors reduce monthly mortgage payments for up to nine months while the homeowner looks for a job.
There are three phases. First, the borrowers would pay 31 percent of household income for 90 days, and if there’s no income, they pay nothing until the next phase. Then in the next 90 days, they must begin paying 31 percent of income and they’re evaluated on what’s called the NPV test, or “net present value” – whether it’s cheaper for the lender to modify the loan or foreclose on the home. If the pass the NPV test, then the borrowers in the last 90-day phase continue paying 31 percent of household income.
If the homeowners find jobs during the nine-month period, they’re then evaluated for loan modifications.
But two more things.
First, the trade group also suggested letting loan servicers borrow, with interest, from the Treasury Department so they can advance principal, tax, insurance and interest payments to investors of unemployed borrowers’ loans. The group said that would be an incentive for investors and lenders to help the jobless.
Second, the group proposed, Treasury and the investors would share any loss in value of “forbearance foreclosures,” with the federal government paying investors a portion of the loss in value. The investors would take the bigger loss.
MBA officials said those two ideas would help persuade investors to agree to forbearance plans for jobless borrowers.
The group’s chief executive John Courson detailed the plans in a Feb. 18 letter to Treasure Secretary Timothy Geithner. Stay tuned.