A forbearance plan is a temporary solution where monthly mortgage payments are reduced or suspended for a short period of time. A forbearance plan is useful at the beginning of a short-term hardship because it gives the borrower time to adjust to the hardship before fees and costs accrue. A forbearance plan does not, however, change the terms of the loan or reduce the amount that the borrower owes. As a result, the borrower will need to address the default amount after the forbearance period, either through a one-time lump sum payment, a repayment plan on top of the regular mortgage payments, or a modification.
Borrowers need to be cautioned that when they enter into forbearance agreements they usually waive certain key rights, such as their ability to raise defenses to contest a foreclosure case. The advocate may want to speak with a legal services provider about this and/or make a referral to legal services to review any forbearance offer the client receives.
FHA Forbearance Options
FHA offers Special Forbearance plans to borrowers who are unemployed and at least three payments behind on their mortgage. The plans may reduce or suspend mortgage payments, and allow for up to at least 12 months of relief. The borrower must be evaluated at the end of the forbearance period for a loss mitigation option that will cure the default.
GSE Forbearance Options
Freddie Mac provides separate requirements for short- and long-term forbearance. In short-term forbearance, if the borrower has an eligible hardship (FDMC Guide §§ 9202.2), the servicer must suspend payments for up to three months or reduce them for up to six months. (FDMC Guide §§ A65.18- A65.19.) In long term forbearance, reduction or suspension of payments is extended to a period of four to 12 months. Long-term forbearance is allowed in the following circumstances: (1) the property or the borrower’s place of employment has been damaged by a natural or man-made disaster; (2) a lawsuit that may jeopardize Freddie Mac’s lien position is pending; (3) the borrower is deceased and the estate is in probate; or (4) the borrower is experiencing a hardship due to the long-term or permanent disability or serious illness of a borrower/co-borrower or dependent family member. (FDMC Guide §§ A65.22-A65.23.)
Freddie Mac has special rules if the hardship is due to unemployment. Servicers must make an initial offer of a six-month forbearance. If, after six months, the borrower is still unemployed, the borrower may receive extended unemployment forbearance for up to six more months provided that the extended forbearance does not cause the delinquency to exceed 12 months of the borrower’s contractual monthly mortgage payment. Borrowers in extended unemployment forbearance must make payments equal to 31% of their monthly income, not including any unemployment insurance payments, or the amount of the short-term forbearance, whichever is greater. (FDMC Guide §§A65.26-A65.28.)
For Fannie Mae loans, forbearance is only allowed in certain circumstances, including, inter alia, natural disaster, death of the borrower or family member, divorce, unemployment, and substantial reduction in income. (FNMA Guide §§ VII, 403.) The servicer may suspend or reduce payments for up to six months. (Id.) The servicer’s ability to extend the term beyond six months is very limited. (Id.)