Treasury To Review MBA's New Forbearance Option

SAN DIEGO—If a new Mortgage Bankers Association program takes hold — which can happen only if the Treasury Department gets on board by agreeing to supply additional funds to participating servicers — unemployed borrowers may be able to count on up to nine months of forbearance as a way to stay in their home.And it may happen sooner, rather than later. MBA’s associate vice president of public policy, Josh Stern, said that it has received an affirmative response where Treasury calls the proposal helpful and states it will continue to have a dialogue with the banking group.The MBA officially introduced the program at its National Mortgage Servicing Conference here. MBA’s president and CEO, John Courson, told reporters that the goal is to help create the framework on which to build a forbearance system to aid those who cannot be helped by the Home Affordable Modification Program.The launch followed lobbying efforts that include a Feb. 18 letter to Treasury secretary Timothy Geithner where Mr. Courson described the MBA program as a means to help Treasury craft a needed enhancement for HAMP. 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, Treasury, 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 unemployed. Among others, at yearend 2009 Michael Calhoun, Center for Responsible Lending president, called on Congress to create a low-cost, short-term loan program for unemployed homeowners so they can keep current on their mortgage. While the State Foreclosure Prevention Working Group encouraged Treasury to support state-based unemployment assistance programs, the federal government recently granted $1.5 billion to state housing agencies to help people suffering from unemployment or whose mortgages are “underwater.”According to Mr. Stern, while it is known that “Treasury is working on something related to unemployed borrowers,” the new MBA program fits the profile of what they are now considering.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 nine 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 re-evaluation and reverification of their employment status — borrowers deemed eligible will continue to pay only 31% of their income.The MBA forbearance program adds a new concept to a 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 5.5 million people joined the ranks of the unemployed last year, as well as the fact that the Bureau of Labor Statistics show last year the average unemployment time extended to six or seven months.One of the strengths of the program is in providing incentives to both borrowers and servicers.So while open to all, the program is, however, voluntary. Servicers who decide to participate can use their own discretion when approving borrowers.“Depending on how they read the accounting rules some sevicers 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- to three-month period instead of three,” Mr. Courson said. Treasury would make available to servicers loans, at an interest rate, once they agree on these extended forbearance periods. Servicers can use these loans to advance principal and interest into the security holders, and also pay taxes and insurance.The MBA is catering to the needs of all servicers, not just the big four banks, which are often seen as the servicing market, Mr. Courson said, since clearly there are hundreds of servicers out there, many of which are not depositories and struggling to find resources out of their warehouse lines or capital to be able to make these advances. “So they’re inclined not to offer as generous forbearance periods, because they just can’t.”The program provides a low-cost borrowing facility for these servicers, along with the payback that will be generated from the forbearance modification. He recalled 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 is suggesting the nine-month forbearance plan is not 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.”