BLOG VIEW: Amidst the tweets about deficit cuts, smart grid innovation and the federal space program, the White House's Twitter Town Hall last week featured an important admission from President Obama – that no federal program will cure the housing market ills. Obama also conceded that fixing the housing situation has proven more difficult than originally thought, and he indicated his plan to go ‘back to the drawing board.’
White House staff translated Obama's remarks into this Twitter-friendly snippet: "Obama: Sorting through who owns what in housing market is tough, so is finding arrangement that works to keep people in homes, still working."
Two days later, the administration did indeed go back to the drawing board, with U.S. Housing and Urban Development (HUD) Secretary Shaun Donovan announcing that the Federal Housing Administration will extend the length of its Special Forbearance program from four to 12 months.
In the same announcement, the administration signaled its intention to similarly implement term changes for the Making Home Affordable's forbearance sub-program, dubbed the Unemployment Program (UP). Those changes, which will extend the minimum term from three to 12 months (where guidelines allow), will be formally announced in the coming weeks in a supplemental directive, the Treasury Department says. The department, which plans to include UP statistics in its future HAMP performance reports, estimates that about 10,000 borrowers are currently participating in UP, a spokesperson says.
In the servicing world of default management, forbearance plans are as tried and true as they come. While sorting through my desk this week, I stumbled upon a sea-foam green hardcover book titled Handbook of Loan Administration (Copyright 1994, Mortgage Bankers Association of America). From the best that I can tell, the book includes no mention of workout waterfalls or trial modifications. There is, however, a description of a special forbearance plan's being "appropriate in the instance where the borrower is experiencing temporary hardship."
Of course, the major "temporary hardship" experienced by delinquent borrowers today is unemployment. Sixty-one percent of borrowers with active permanent HAMP modifications cite either a loss of income or unemployment as the main reason they need assistance. According to Donovan's comments Thursday, nearly half of unemployed Americans have been out of work for at least six months.
"These changes are needed because current unemployment forbearance programs have mandatory periods that aren't in line with how long it takes the majority of unemployed borrowers to find a job," he said.
Rather than try to reinvent the wheel, as Obama and his housing advisers have been criticized as attempting to do with its various foreclosure-avoidance programs, the administration returned to a simple and well-understood concept.
The government-sponsored enterprises (GSEs) do not participate in UP, but they have long had their own forbearance programs. Fannie Mae provides up to 12 months' forbearance for unemployed borrowers. According to a servicing update that Fannie Mae issued last September, the first six months of forbearance are left to the servicers' discretion. Servicers can request up to an additional six months for borrowers who are looking for work or have promising leads.
"We think these guidelines provide the appropriate tools to prevent foreclosure whenever possible for unemployed homeowners," a company spokesperson said in an e-mail statement.
The terms are slightly different at Freddie Mac. The company routinely advises servicers, in the wake of natural disasters, to offer long-term forbearances on the order of 12 months. Extreme circumstances aside, servicers have delegated authority to provide a three-month forbearance with no payments or a six-month forbearance with a reduced payment amount.
Short-term forbearances at Freddie Mac have grown from nearly 4,200 in 2008 to 34,594 last year. In the first quarter of this year, Freddie Mac servicers entered into 7,678 such short-term agreements.
It remains to be seen whether this apparent newfound emphasis on forbearance plans will make a dent in a world of 9.2% unemployment. But something tells me it will take a much stronger hold than the HUD-administered Emergency Homeowners' Loan Program (EHLP) – the $1 billion direct-assistance program that also aims to cure defaults caused by unemployment. HUD projects that program could aid as many as 30,000 borrowers.
But a slow start out of the gate, coupled with a limited window of opportunity for borrowers to apply (applications are only being accepted through late July in most states, a point that the many counseling agencies involved with the program have been trying to reinforce), does not bode well for EHLP's ultimate success.
(CORRECTION: This blog originally stated EHLP's application deadline for July 22, whereas the actual deadline varies by state. We regret the error.)
