In a recently-released report, the Conference of State Bank Supervisors (CSBS) concluded that the Home Affordable Modification Plan (HAMP) is less effective than it should be because it does little to address the biggest reason for mortgage foreclosure: unemployment.
The State Foreclosure Prevention Working Group, an organization of attorneys generals from 11 states, asserts that "both servicers and Treasury should provide better options to keep unemployed homeowners in their homes. Unemployment and loss of income are key catalysts to a mortgage default."
Mortgage Assistance Not Forthcoming
Michael Heid, co-president of Wells Fargo Home Mortgage, said that a quarter of the borrowers in trial mortgage modifications are likely to lose their homes. Some participants haven't provided needed documents, others don't qualify for a modification because they have too much debt or their income isn't sufficient because of unemployment or underemployment.
The Treasury Department and the Hope Now coalition have been discussing solutions for the unemployment problem since July 2009, but have yet to implement a solution. Early rounds of hammering out mortgage reform included a proposal to divert $3 billion to help unemployed homeowners, but that assistance never made it into the bill. More recently-proposed reforms make no mention of helping unemployed homeowners. With far more financial aid dedicated to banks than for individuals, you can't hold your breath waiting for government assistance.
What Can You Do to Secure a Mortgage Modification if You're Unemployed?
First, unemployment alone should not deter you from considering a mortgage modification. According to Fannie Mae, unemployment benefits can be considered in determining if you qualify (emphasis added):
"If the borrower receives public assistance or collects unemployment:
Acceptable documentation includes letters, exhibits, or a benefits statement from the provider that states the amount, frequency, and duration of the benefit. The servicer must determine that the income will continue for at least nine months."
To be approved for a mortgage modification, you need to have enough income to make a reasonably modified payment. To see if your unemployment benefits are sufficient to qualify you for a loan modification, you'll need to make a few calculations. First, add up your monthly housing expenses -- including mortgage payment, property taxes, homeowners insurance, and HOA dues if applicable - then multiply that sum by 0.31. The result is your maximum allowable modified monthly mortgage payment (assuming you are approved).
If your present mortgage payment is above this number, you may qualify for a modification. To help lower your payment down to this level, your lender may lower your interest rate for a period of time or extend the term of your loan. In some cases, you may also be able to get a principal reduction from your lender. While this is still not very common, it can be more likely if you are severely underwater.
If your unemployment benefits are insufficient to allow you to qualify for a modification, you may be able to boost your income by taking in a roommate. Here's what Fannie Mae has to say about this (italics added):
"Servicers should include non-borrower household income in monthly gross income if it is voluntarily provided by the borrower and if there is documentary evidence that the income has been, and can reasonably continue to be, relied upon to support the mortgage payment. All non-borrower household income included in monthly gross income must be documented and verified by the servicer using the same standards for verifying a borrower's income. (An example of non-borrower income is boarder income.)"
And if you have too much debt? Many lenders' guidelines preclude granting modifications if your monthly payments to creditors plus your living expenses exceeds your net income. So, to get a modification while unemployed, you need to increase your income or decrease your debt payments. Try to negotiate lower payments from your creditors -- one at a time -- before applying for a home loan modification.
What About Bankruptcy?
Attorneys have mixed opinions about bankruptcy and mortgage modification. On one hand, if you are in the middle of pursuing a modification, filing for bankruptcy protection can stop it in its tracks. On the other hand, if you have already been denied a modification, a Chapter 7 or Chapter 13 filing can get your other debts discharged or reduced, your payments under control, and wipe out the arrearages to your mortgage lender. At that point you may have more bargaining power than you did before filing. Check with a good bankruptcy attorney -- an hour with a real professional is money well spent.
Other Programs -- Public and Private
While the federal government has been rather slow coming up with mortgage assistance for unemployed homeowners, other organizations have not. One bank is especially proactive: Citi's Homeowner Unemployment Assist program for qualifying unemployed borrowers lowers monthly mortgage payments to $500 for three months.
Some builders like Toll Brothers also have mortgage loan assistance programs for their homebuyers who lose their jobs. Also, the state of Connecticut has implemented a program called the Emergency Mortgage Assistance Program (EMAP), designed to help those who are unemployed keep their homes out of foreclosure.
Tap Your Mortgage Insurance
Unfortunately, mortgage insurance is there to protect the lender, not you. However, the insurance company first wants to protect itself, and it may save a lot of money by granting you a no-cost loan to bring your mortgage current and keep you out of foreclosure. FHA mortgage insurance works much the same way, only the advance is called a partial claim.
Hang in There
Mortgage assistance for unemployed homeowners is limited and quite fragmented. Yet, there are sources available. Track them down, be persistent, and push for your modification. You will have to be self-reliant -- mortgage lenders tend to help those who help themselves.
Gina Pogol has been writing about mortgage and finance since 1994. In addition to a decade in mortgage lending, she has worked as a business credit systems consultant for Experian and as an accountant for Deloitte.