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The Federal Housing Administration (FHA) has released a notice to servicers outlining new guidelines pertaining to trial payment plans for FHA loss mitigation actions. The new rules go into effect October 1.

When offering permanent modifications or partial claims, servicers must implement trial payment plans for any borrowers who have missed at least two payments in the past year; have failed a HAMP trial payment plan; have a net surplus income of less than 20 percent of their total net income; or whose mortgage was originated fewer than 14 months ago.

Trial plans are also required when a borrower has been 90 or more days delinquent at any time in the previous 36 months; has defaulted within 90 days of a loss mitigation action in the past year; or in any case when a servicer feels a trial period is necessary.

“A trial payment plan is an important tool for confirming a mortgagor’s readiness and ability to make regular monthly mortgage payments and avoid re-default,” theFHA stated in its letter to servicers.

All trial payment periods must last for at least three months.

For any FHA loan modifications, the FHA prohibits servicers from including any provisions which would require a borrower to relinquish his or her right to loss mitigation options.

With no sustained pickup in the job market, over six million Americans have been unemployed for longer than 27 weeks. Such extended periods of joblessness remain the predominant force behind the industry’s high volume of seriously past-due mortgages.

With these realities weighing on an already fragile market, the federal government said Thursday that it will extend mortgage relief for unemployed homeowners to a year under the Federal Housing Administration (FHA) and Making Home Affordable (MHA) programs.

For those with an FHA loan, the administration is requiring servicers to extend the forbearance period for unemployed homeowners from four to 12 months. The agency says it will also remove upfront hurdles to make it easier for borrowers who’ve lost their jobs to qualify for FHA’s special forbearance program.

All FHA-approved servicers must participate in the agency’s loss mitigation program, which includes the special forbearance program. FHA also reemphasized its requirement that servicers conduct a review at the end of the forbearance period to evaluate the borrower for all applicable foreclosure assistance programs and notify the borrower in writing whether or not they qualify for additional help.

The administration also intends to require servicers participating in MHA to extend the minimum forbearance period offered under the Home Affordable Unemployment Program (UP) from three to 12 months wherever possible under regulator and investor guidelines. Additionally, forbearance under UP will become available to borrowers who are seriously delinquent.

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The Federal Housing Administration (FHA) began offering new government-insured mortgages to rescue underwater borrowers yesterday, but the new Short Refinancing program may face as many limitations as earlier programs designed to aid the still sputtering housing market. The Treasury Department set aside $14 billion in Troubled Asset Relief Program (TARP) funds to encourage mortgage servicers to support write-downs of second mortgages and to provide coverage for a share of potential losses on these new loans, according to HUD.
The combination of TARP dollars and the FHA insurance means the new lenders will have a loan backed by the U.S. for up to 97.75% of the home value. Under the program, eligible borrowers can receive an FHA-insured loan if the lender or investor writes off the unpaid principal balance of the original first-lien by at least 10%. To be eligible for the new loan, the homeowner must be underwater but still current on the mortgage, which cannot be already insured by the FHA. A credit score of 500 or better is required. The new refinanced loan must have a loan-to-value ratio of no more than 97.75%. After receiving the new refinancing through the program, the borrower’s combined loan-to-value ratio on the re-subordinated mortgages cannot exceed 115%. The new FHA mortgage can only be used to refinance the unpaid principal balance on the first lien.

In theory this sounds good. Like most government programs, in practice is a whole different story. What happens if you sell the home after the refinance? The borrower has to be underwater, but not late on their payments? This would include a good portion of the homes purchased from 2000-2007. The government is going to cover a share of the write down losses for the bank/mortgage company? How much and why would banks do this?

Obviously there are many unanswered questions and only time will tell if this a viable alternative for distressed homeowners or just another fail attempt by the government to stop the bleeding.