Mortgage Assistance for Unemployed Announced

The Obama administration today announced new measures to provide mortgage assistance for unemployed homeowners and encourage lenders to reduce principal on “underwater” mortgages when modifying loans for at-risk borrowers.

The new guidelines, announced today, will provide unemployed homeowners with a temporary forbearance on their mortgages for three to six months while they seek new work. During that time, their payments will be reduced to an affordable level.
 
Once they obtain new employment, they will be eligible for a loan modification reducing their mortgage payments to 31 percent of their new monthly income. Homeowners failing to obtain work during that time will be eligible for foreclosure alternatives, such as incentives for surrendering the home through short sale.
 
Lenders will be required to look to principal reduction as a first option in reducing mortgage payments for all loans modified under the government’s Home Affordable Modification Program (HAMP). New incentives will be provided for lenders to reduce principal for eligible homeowners when the loan-to-value ratio on the mortgage exceeds 115 percent, in order to reduce mortgage payments to 31 percent of monthly income.
 
The new guidelines apply to all mortgage servicers participating in HAMP, which accounts for the majority of existing U.S. mortgages. They do not apply to mortgages that do not meet HAMP eligibility requirements, including high-end mortgages where the loan balance exceeds $729,750.
 
No definite timetable has been established for the new rules to go into effect, although the administration says they will be taking effect over the coming months and all will be in place by this fall. Some mortgage servicers have already begun to follow them on their own.
 
Participating mortgage servicers must offer forbearance to all unemployed homeowners meeting HAMP criteria, and must be eligible to draw unemployment assistance. Unemployed homeowners must apply for forbearance within 90 days of becoming delinquent on their loans.
 
Lenders will also be required to explore principal reductions for homeowners currently in trial or permanent loan modifications under HAMP, provided their loan-to-value ratio exceeds 115 percent. Principal reduced will be held in a separate account for up to three years, and gradually forgiven if the homeowner stays current on their new mortgage payments.
 
The administration also announced new rules that will help underwater borrowers who are current on their mortgages obtain principal reductions while refinancing into a new FHA. Under this voluntary program, underwater borrowers whose mortgages are not currently insured by FHA may be eligible for an FHA refinance if their current lender agrees to reduce their principal by at least 10 percent, to no greater than a 97.5 percent loan-to-value ratio.
 
Because the program is voluntary for lenders, borrowers eligible for the program will be selected and contacted by their mortgage servicers. Specific guidelines for the program will be issued in the near future.
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