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Even the unemployed deserve FHA mortgage modifications

Senators say current system discriminates against the nation's elderly

Policymakers are taking to their soapboxes, pointing out unfair lending requirements listed in the Federal Housing Administration mortgage modification policy.

Under the current eligibility criteria outlined in the Mortgagee Letter 2012-22, which discloses the revisions to FHA’s loss mitigation home retention options, borrowers must be currently employed to qualify for a loan modification.

Sens. Tim Johnson, D-SD, and Elizabeth Warren, D-Mass., sent a letter to FHA Commissioner Carol Galante, urging the agency to eliminate the requirement for loss mitigation policies.

"While verifying employment is an understandable requirement if a borrower’s income source is employment, the currently employed requirement discriminates against the many Americans who have stable and verifiable sources of income apart from employment," both Senators explained.

The group of Americans that would be prevented from participating in FHA’s loan modification program range from seniors with personal retirement accounts to single mothers receiving child support to veterans with benefits.

"There is no good justification for restricting access to the loan modification program based on the source of one’s income, and there is certainly no justification for doing so in a manner that systemically hurts our seniors, veterans and single mothers," the Senators argued.

Some market experts are confident the FHA will reevaluate the currently employed criteria and ultimately publish an update mortgagee letter altering its current employment threshold for modifications.

"While it is difficult to project the overall impact a change to this provision could have on the market, there were 655,000 seriously delinquent FHA borrowers as of June so every little tweak to the FHA’s modification guidelines can help," explained Compass Point policy analyst Isaac Boltansky.

He continued, "Given that FHA reform efforts on Capitol Hill appear stalled, administrative changes such as this one may be all we see in the months to come."

The requirement seems in line with the announcement FHA made last month, in regards to offering mortgage insurance to borrowers who, during the crisis, filed for bankruptcy or lost their home through a foreclosure or short-sale proceeding.

The insurance is available to those who can prove they are no longer financially compromised.

Industry analysts pointed out that FHA already provides a loss mitigation option for borrowers that are unemployed through its special forbearance plan.

The nature of a modification would require that a borrower have sufficient income to pay the new mortgage for the long term, which also has costs associated with the modification itself, pointed out The CollingWood Group partner Tim Rood.

"To me it seems reasonable to expect that a borrower entering into another long-term loan contract should have the expectation of being able to make those payments for the long term," Rood stated.

He added, "One of the benefits of a loan mod is a reduced loan payment, which can also be achieved under the terms of an FHA Special Forbearance Plan. In my opinion the requirement for employment income to qualify for a loan modification is beneficial to the borrower in that the expectation is the borrower will be able to remain in the home for the long term as there is a reasonable expectation that the employment will continue."

Nonetheless, policymakers are asking the housing agency to address the issue and make clear that borrowers who rely exclusively on unearned income sources are not categorically excluded from the FHA’s loan modification program.

"The currently employed provision is bad for homeowners and also bad for FHA, which benefit from a more effective loss mitigation program," Warren and Johnson concluded. 

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