Mortgage Giant Pushes Alternative to Foreclosure
The CEO of Freddie Mac, which owns a quarter of the nation's mortgages, is using his bully pulpit to encourage banks to help out hurting homeowners. In an interview with HousingWire, a mortgage industry site, Charles Haldeman said the mortgage market would be healthier if bankers gave struggling homeowners a little breathing room through forbearance, rather than going straight to foreclosure. The forbearance process is designed to help homeowners who get slammed with bad luck -- e.g., loss of a job, illness, divorce -- to skip payments for three to six months. The unpaid balance is tacked on to their existing mortgage. In another push for forbearance, the Army yesterday announced that Fannie Mae and major banks had committed to offering forbearance to military families struggling to pay the mortgage.
Brad German, a spokesman for Freddie Mac, says homeowners typically use forbearance not only to get back on their feet financially, but also to work out a more far-reaching agreement with the bank, such as a loan modification. Unfortunately, those agreements can be very hard to come by, as MoneyWatch columnist Ilyce Glink has documented in her posts on loan modification hell. And if the forbearance process simply results in a larger loan and a higher monthly bill, many homeowners will never recover.
Would increased emphasis on forbearance help the nation's housing crisis? It's not clear that it would. First of all, some analysts say half the people who get loan modifications default anyway. "Delaying payment does nothing but kick the can down the road six months," says Alan Levenson, chief economist at T. Rowe Price, unless it is paired with a modified loan and a reduction in principal. "One model would be where the bank agrees to write down negative equity, with a recasting of the loan to make it more affordable, perhaps in return for a share of the future appreciation; that is the homeowners don't get all the upside if they've been forgiven some of the downside." The 6.2 million people out of work for six months or longer are probably not in a position to resume mortgage payments even after a forbearance period -- and if they don't expect the house to be worth as much as they owe, they have little incentive to make payments anyway.
To be sure, even if the benefits to the economy are questionable, a few months of breathing room no doubt sounds great to desperate homeowners. Here's what you need to negotiate forbearance with your lender.
A life-changing event. To be eligible for forbearance, you need to have suffered some sort of temporary setback, such as the loss of your job, an illness, or a divorce. The bank wants to see an indication that your situation will improve in the future and you can resume payment. After three months, German says, the bank will review your situation to see if you can get back on a regular payment schedule. Given current economic conditions, he says "it's not unusual for these things to be extended."
A short snorkel. Weigh the short-term benefit -- you won't have to make a mortgage payment next month -- against the long-term cost, which is that the total you owe to the bank is increasing. So if you owe more on your mortgage than your house is worth, forbearance means you are sinking farther underwater. Ask yourself if adding to your debt load is worth the benefit of having more time.
A realistic outlook. Before seeking forbearance, you ought to ask yourself some hard questions, namely: Can I ever dig myself out of this hole? Gary Schatsky, a fee-only financial advisor, points out that increasing the amount you owe could be counter productive. "At this point you're merely piling up liability," he says. "Is there a light at the end of the tunnel? Is there something that will dramatically enhance your financial situation?" If not, you might be better off pursuing a short sale or even declaring bankruptcy.