FHA delays foreclosures for unemployed

The day after President Barack Obama admitted to mishandling the housing crisis, his administration took steps toward delaying foreclosures on some unemployed Americans.

The Federal Housing Administration announced that it will require banks to extend the minimum forbearance period for unemployed homeowners to 12 months for FHA and Making Home Affordable Program (MHA) loans. (SEC cedes leasing power after ‘terrible’ $550 million mistake)

Under previous regulations, the minimum forbearance period allotted for unemployed homeowners was four months and under the new requirements the maximum will be a period customized to FHA borrowers’ needs.

The FHA is introducing the new policy since few bank lenders have offered up 12-month forbearance periods to unemployed homeowners, Housing and Urban Development Secretary Shaun Donovan said.

“We have been disappointed that more services haven’t gone beyond the four months. The reason we took this step now is that in every case that they are doing this, that they go to that 12 months,” Donovan said.

While the new rules will only affect FHA and MHA lenders, the administration hopes other programs, like Fannie Mae and Freddie Mac will follow suit.

“Part of why we are doing this, is to set a single standard, is to try to push the broader market to extend their unemployment programs and forbearance programs,” Donovan said.

The Heritage Foundation’s David John, an expert on finance, said the practice may be helpful for keeping the already flooded housing market from becoming further bogged down with foreclosed homes.

“When it comes down to it, if the alternative is, at this point, to have those houses foreclosed upon, empty and vandalized, then this decision makes a certain amount of sense,” John said. “It very well may be a good move.”

John said that extending the period could ultimately help the housing industry

“This is more of a timing issue. Obviously, we all hope that the unemployed workers will find a job and be able to save their house,” John said. “It’s not like these are homes that could be vacated or sold quickly.”

Approximately 10,000 homeowners have participated in the MHA program since Aug. 1, 2010. Donovan estimates that 17,000 homeowners received special forbearance over the last year and 3,500 homeowners are considered delinquents monthly

Donovan said the new rules are expected to help a large number of minority homeowners, the FHA’s largest recipient group of FHA and MHA loans.

“This is critically important to minority borrowers. 76 percent of all African Americans who bought homes used FHA. There is also wide usage of HAMP [another term for MHA] for minority borrowers as well,” Donovan said.

Those unemployed whose foreclosures have already been extended by lenders will also be able to use the extended forbearance period.

Those wishing to extend forbearance periods because of unemployment are not required to be receiving unemployment benefits, Donovan said. After the forbearance period ends, beneficiaries with the means to repay will be obliged to do so.

“If they’re re-employed, if they can get back on making regular payments, they will still be required to make up those forborne payments,” Donovan said. “In a case where they’re re-employed at a lower salary, there are other options that would eliminate that forborne amount.”