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More Help For Struggling Homeowners

A revamped program launched on Wednesday aims to help homeowners who’ve lost their jobs from going into foreclosure. But experts warn there are drawbacks that could saddle some borrowers with even more debt.

Beginning on Feb. 1, cash-strapped homeowners with a Freddie Mac-backed mortgage who are unemployed could be absolved from paying their mortgage for up to one year while they try to find work. Previously, the company allowed a six-month break for such homeowners, and extended that period on a case-by-case basis. Roughly 18% of outstanding mortgages – or about 10.5 million mortgages – are owned or serviced by the quasi-government agency, according to Inside Mortgage Finance.

The extension comes as the government is trying to limit the number of homes going into foreclosure. Last week, the Obama administration said it was extending the government’s mortgage modification program by an additional year to run through the end of 2013. Separately, the government is working out a settlement with big banks and states’ Attorneys General that experts say might be announced soon and could do more to reduce principal balances on mortgages of struggling homeowners. Roughly 4.8 million homes received a foreclosure notice during the past two years, according to RealtyTrac.com.

Freddie Mac says the extended relief program can help stave off foreclosure for homeowners grappling with the consequences of joblessness. “We believe this will put more families back on track to successful long-term homeownership,” says Tracy Mooney, senior vice president of single-family servicing at Freddie Mac. There’s also a larger benefit, say housing experts: Preventing foreclosures could stabilize home values and help homes that have been lingering on the market to sell faster, since there’ll be fewer foreclosed homes to buy on the cheap.

Experts agree that the extension could help many borrowers. On average, unemployed people have been without work for 41 weeks, according to December data from the Bureau of Labor Statistics. A year of suspended mortgage payments can buy the borrower time to find work before they have to resume paying the mortgage. “Forbearance for unemployed homeowners is a win-win – these people are in need of immediate assistance,” says Susan Wachter, professor of real estate and finance at the University of Pennsylvania’s Wharton School.

But these same experts warn that the program has potential pitfalls. When the temporary relief ends, the borrower will have a hefty bill to pay. And they could find themselves in a deeper hole than they were before. Late fees aren’t added to the mortgage while it’s in forbearance, but interest is accruing and the unpaid principal that would have been paid during the relief period will be due when it ends. Freddie Mac says the borrowers who aren’t able to pay that amount in one lump sum could be offered alternative payment options, like paying that amount over time while simultaneously making their regular monthly payments.

If forbearance doesn’t work, a loan modification could be an option. Homeowners who were struggling with their payments while they were employed should consider a loan modification, which results in smaller monthly payments and would also last for a longer period of time than forbearance relief, says Keith Gumbinger, vice president at HSH Associates, a mortgage-data firm.

Borrowers who decide to proceed with forbearance will need to meet several qualifications. They’ll have to notify the servicer (that’s who they send their monthly payments to) of their job loss and provide income proof like a pay stub or tax form showing they are or will soon be unable to pay the mortgage. If the unemployed borrower’s spouse is working or if the household receives income from other sources that’s enough to pay for the home loan, they might not get approved for forbearance. And borrowers who are approved should expect ongoing calls from the mortgage servicer inquiring about their job search; if the company determines the borrower has stopped job hunting they could end the forbearance program.

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