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The Mortgage Bankers Association (MBA) has proposed a new tool for the Home Affordable Modification Program (HAMP) to specifically address the problems of unemployed borrowers. 

The Unemployed Borrower Bridge to HAMP Modification was laid out by MBA President John A. Courson in a letter to Treasury Secretary Timothy F. Geithner and proposes up to nine months of forbearance for unemployed owner-occupants before they are considered for a HAMP loan restructuring.

In addition to forbearance, MBA's proposal calls for establishing a Low Cost Advancing Vehicle (LCAV) within Treasury to supply reasonable funds at a fixed rate to participating mortgage servicers to cover advances during the forbearance period.  It also suggests a risk sharing mechanism that would encourage stakeholders to take the greater risk of loss from postponing or stopping foreclosure by paying a portion of lost value of the home to the investor, similar to the home price decline program.

The MBA's proposal is in response to an increase in the numbers of unemployed and a corresponding increase in the number of seriously delinquent mortgage loans and foreclosures.  The January HAMP report named loss of income as the reason for over 57.4 percent of HAMP modifications and the U.S. Bureau of Labor Statistics has reported that the average unemployed U.S. worker was out of work for six to seven months in 2009.

Courson points out in his letter that, while unemployment is a serious challenge for many American's right now, "it is usually a temporary condition where the worker is actively searching for a job and willing to work." 

The Bridge program would allow an unemployed borrower to enter into a forbearance plan for the first of three possible 90 day phases.  During the first phase borrowers would be evaluated for their ability to make payments at 31 percent of household income.  If that calculation results in a payment under $300, no payment would be required during the first phase.

In the second phase and third phases all borrowers including those below the threshold, must make payments and the borrower must pass a net present value (NPV) test in the second phase.  If at any time during the process the borrower becomes employed, then he will be evaluated for a regular HAMP loan modification. Borrowers would be reevaluated as to employment and income status at the end of each phase for possible total of nine months of forbearance.  The entire plan, however, apparently hinges on borrowers having unemployment compensation available to them and nine months worth available in order to merit the full nine months of forbearance. During forbearance, no late fees would be permitted nor could a foreclosure sale take place.  Foreclosure costs and fees could be capitalized in the modification.

The NPV would be calculated using 31 percent of the presumed household income which would be based on assuming the new employment would be at 75 percent of the previous salary. The P&I portion of that 31 percent (eliminating taxes, insurance, HOA fees) would be determined and then the interest rate that would achieve that payment.  If the rate calculated is equal to or greater than the rate below, the servicer would extend forbearance, if not the forbearance period would end.

               LTV                           Rate

            Below 90                     Forbearance should not be extended

            90-94                           3%

            95-99                           2.5%

            100+                            2%

Most borrowers would be eligible for HAMP modifications at the end of the forbearance period provided they meet the other HAMP eligibility criteria.  However, under MBA's plan, if the borrower's new income results in a debt-to-income ratio less than 31 percent the servicer could either enter into a repayment plan or modify the mortgage without reduction of interest rate.

Courson said that the best result would be that a nine-month forbearance plan would not be considered a troubled debt restructuring (TDR) because partial payments would be made during the period and thus there would be no significant loss of cash flow.  If such plans result in TDRs the issue becomes how that is treated under generally accepted accounting practices.  Requiring amortizing payments during forbearance "would demonstrate that the loan is not collateral dependent, thus providing a reasonable basis to measure these loans using a discounted present value of expected cash flows rather than the collateral value."  He said that the issue is being debated by the Office of Comptroller of the Currency but unless favorable accounting treatment is allowed and appropriate lending facilities are offered (LCAV) the program must be voluntary and flexible.

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