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The MBA Challenges Treasury With New Forbearance Option

Unemployed borrowers may be able to count on forbearance if a new Mortgage Bankers Association program takes hold - which can happen only if the U.S. Department of Treasury gets on board by agreeing to supply additional funds to participating servicers.

The MBA officially introduced the program at the national servicing conference in San Diego.

It followed lobbying efforts that include a February 18, 2010 letter to Treasury secretary Timothy Geithner where MBA's president and CEO, John Caurson described the MBA program as a means to help Treasury craft a needed enhancement for the Home Affordable Mortgage Program. The letter argues that an extended forbearance program "is in the best interest of borrowers, servicers, investors, and the taxpayers," since it is a better way of using resources that avoids "putting people with temporary problems into permanent solutions paid for in part by the government." At least in principle, the Department of Treasury, the MBA and various specialty servicers seem to agree that an extended forbearance period is an effective solution for borrowers falling behind in their mortgage payments due to involuntary unemployment.

According to the MBA, its forbearance program adds a new concept to the limited list of options available to those who do not qualify for HAMP. It creates a safety net for millions of people in times when the long-term unemployment rate has reached historical levels. The MBA said the program was inspired by data showing in 2009 5.5 million people joined the ranks of the unemployed, as well as the fact that the Bureau of Labor Statistics reports show last year the average unemployment time extended to six or seven months.

The forbearance program proposes servicers reduce monthly payments to an affordable amount for up to nine months calculated at 31% of their current income to homeowners who lost their job or suffered a severe reduction in income, as a way to allow them to remain in their homes.

The MBA model also assumes borrowers will be re-employed in 9 months at 75% of their previous salary. Once re-employed, they will be evaluated under HAMP.

Homeowners with 10% or more equity in their house would not qualify for the program after the first forbearance period because the equity on their house is seen as an available resource.

To ensure processing efficiency borrower information is updated periodically during the 90-day period. At the end of the first, second or third month -- after the reevaluation and re-verification of their employment status -- borrowers deemed eligible will continue to pay only 31% of their income.

The program is however voluntary. Furthermore, servicers who decide to participate can use their own discretion when approving borrowers.

"Depending on how they read the accounting rules some servicers may only want to go through the first two periods, or 180 days, because they are not treating it as a troubled asset on their balance sheet. For accounting purposes some servicers may opt for a two-three months period instead of three," Mr. Courson told reporters during a press conference in San Diego.

Servicer incentives are another key component of the program, he said. Treasury would offer servicers loans at an interest rate so they agree on these extended forbearance periods.

He recognized that during the program development phase when the MBA was inquiring with servicers and other stakeholders, their feedback revealed concerns related to the accounting treatment of loans in forbearance. To honor those concerns the MBA suggests a nine-month forbearance plan "would not be considered a troubled debt restructuring" asset since albeit partial, borrower payments will generate cash flow. According to the MBA, "Unless favorable accounting treatment is granted and appropriate lending facilities are offered, the program must be voluntary and flexible."