Banks urged to offer forbearance of mortgage loan payments for those who are unemployed

 

With unemployment at record high levels, federal regulators are working with banks to curb future foreclosures for those who have lost their jobs, or have had a salary decrease.

According to a recent article in the New York Times, the The Federal Deposit Insurance Corporation, which protects consumer deposits when banks fail, recently recommended that lenders provide certain borrowers with a temporary respite from mortgage payments, or a forbearance. That relief would last up to six months, and sometimes longer, as the lenders work on long-term loan modifications.

“We want to make sure lenders do this as a strategy to mitigate losses to the F.D.I.C., but also because it’s the right thing to do,” said Michael H. Krimminger, the special adviser on policy to the F.D.I.C. chairwoman, Sheila C. Bair.  The F.D.I.C reported in September that banks are reporting record high losses on loans, and some action has to be taken to limit those losses as quickly as possible.

"Under the agency’s plan, lenders would reduce loan payments to “affordable levels” for those borrowers who defaulted on their mortgages as a result of job losses or salary reductions. The new payments, the agency said, would be low enough to allow for “reasonable living expenses” in addition to the mortgage."

The plan, announced in September, applies only to the 53 financial institutions that relied on the F.D.I.C.’s insurance fund while acquiring failed banks. It does not include the four major mortgage lenders: Wells Fargo, Bank of America, Citigroup and JPMorgan Chase. These banks already have unemployment forbearance programs, though they differ from the F.D.I.C. plan.

The plans offered by the four largest banks each differ, but the one thing in common with all of the largest banks’ plans is that the banks will look at each individual’s economic circumstances, and the history of your financial management skills.

According to Jack Schakett, Bank of America’s credit loss mitigation strategies executive, “People who were already struggling with their mortgage payments would be less likely to end up with a job that would help them be successful in the future.”  It seems to me that Mr. Schakett is saying that if you are already delinquent, you will not qualify for the forbearance plan.  But, if you're not already delinquent, will B of A talk forbearance to you? 

Basically almost all the banks involved in some form of forbearance program will require a home owner to already be delinquent on the mortgage payments to qualify for forbearance. What does this say about your prospects to get a new job?

Once your mortgage goes delinquent, your credit scores drop dramatically and quickly. Currently, when you are in a forbearance or modification program, banks are reporting the payments you make as “debt settled” or “partial payments accepted,” which further trashes your credit scores.

Employers often DO pull credit reports on potential employees. Low credit scores DO impact your potential to get a good job.

So is this program a blessing or just a another curse for unemployed home owners?

Each home owner has to decide how important it is to themselves and their families to hold onto their home. If you have substantial equity, it makes sense to grab every advantage to work with your lender to save your home. But what about those home owners who are already underwater on their home, with values continuing to drop?

Working with everyone is "the right thing to do" in this economy.  Banks need to step up their efforts to stop the losses, and home owners need help to save their homes.  Foreclosures are hurting everyone!  While the F.D.I.C. is encouraging banks to work with the unemployed and underemployed, why don't they go one step further and encourage all banks to start working with borrowers sooner, and stop destroying credit in the process? 

Would a short sale make more sense than a forbearance? Or would it make more sense to just stay in your home “mortgage free” until you lose your home to foreclosure?  According to recent news reports, and individuals I have talked with lately, foreclosures can take as long as a year before you are put out on the street.  

My suggestion is if you are in trouble, talk with one or more attorneys to get financial advice for your individual situation. Most attorneys offer a free consultation. You should expect to fill out a very detailed questionnaire about your finances prior to the consultation. In reward for your efforts, you are likely to learn of some options that you had not considered. But, at the end of the day, you need to weigh all your options and decide what you think will work best for you.