Try forbearance to fix late mortgage

Dear Real Estate Adviser,
My wife and I have mortgage problems. We are struggling to pay an FHA loan and applied for the FHA Home Affordable Modification Program, or HAMP, but were denied. However, our bank notified us that we can qualify for a “Special Forbearance.” What does that consist of? And will there be fees upfront?
— James

Dear James,
The word “forbearance” means “to hold back.” In this case, your bank has agreed to hold back on its legal right to foreclose on you through a plan to bring you current on your mortgage payments after giving you a bit of a breather.

I must stress that forbearance is not loan forgiveness. It’s essentially a mortgage modification technique applied to certain borrowers who are typically at least three mortgage payments in arrears. There are hundreds of thousands of homeowners in that precarious position at present.

In a forbearance, your mortgage payments are either reduced or suspended for a time agreed on by your lender and (or) servicer. At the end of that period, you will be expected to resume your old payments plus make additional partial payments to cover the arrears and eventually get the loan current. Sometimes, banks will stipulate that the borrower make a single, lump sum payment by a given date to cover those missed payments.

Lenders are more apt to grant forbearance to persons whose incomes have been reduced temporarily for any number of reasons such as job loss, unpaid mandatory leave, illness or other emergency. Before asking for such a loan modification, borrowers should be ready to demonstrate their good-faith efforts to pay their mortgages and other bills and to reduce expenses. Forbearance is not the answer for all troubled mortgagees. For instance, borrowers with adjustable-rate mortgages that have reset to unaffordable levels usually must seek a longer-term remedy.

As for paying fees, there is a chance you may be caught in a transitional period where banks can still legally charge upfront fees and you’ll have to pay them something. I say that because the Federal Trade Commission, or FTC, has proposed a national rule banning lenders from charging upfront fees for forbearance and other mortgage modification programs. In some states, including California and Florida, those upfront fees are already illegal.

The FTC’s 45-day public comment period on the proposal ends March 29, and the proposal could become national law. It is a response to the wave of fraudulent enterprises that have charged distressed homeowners upfront fees for mortgage modification services that were never delivered. Following the Fed’s lead, many lenders are already backing off upfront fees and factoring them into the modified note.

Make sure the terms are truly manageable before signing a forbearance agreement. But as arrears options go these days, it’s not a bad one. Good luck getting back on your feet.

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