Most homeowners do not realize that a loan modification (referring to a HAMP loan) will usually contain a forbearance agreement to postpone, suspend or reduce the payments for a limited and specified amount of time. Unfortunately, the forbearance agreement is accruing interest while the loan has been suspended or postponed.
When the forbearance has ended, the unpaid interest is added back to the principal of the loan…which usually causes the outstanding balance to increase to an amount higher than what was originally created.
While the forbearance agreement is in effect, the lender has agreed not to foreclose on the property or escalate payments. In return, the homeowner agrees not to dispute the actions of the lender to collect the debt should they default on the loan.
Nevertheless, it is a workout solution that is offered to homeowners that have suffered a temporary financial hardship.
Fannie Mae’s Form of Forbearance Agreements
Since Fannie Mae and Freddie Mac are the primary investors on more than 60% of mortgage loans, it would only seem logical that the two GSE’s would dictate how loan modifications are structured. To that end, let’s look at the various options of a Fannie Mae forbearance agreement.
Special Relief Measures
If your lender/servicer has offered Fannie Mae’s Special Relief Measures, then this program is designed to help homeowners who have a temporary reduction in income or increase in expenses and the hardship will last for a short period of time. Under this program there are 3 other workout solutions that may assist with temporary hardship.
- Temporary Indulgence – the homeowner is given a 30 day grace period to bring in all delinquent payments at one time. This is an ideal solution for the homeowner who expects a lump sum of cash from an insurance settlement, lawsuit, or other source.
- Repayment Plan – this solution allows the homeowner to continue making mortgage payments with an increased amount added to supplement the arrearages. It will allow the homeowners to recover in a short period of time while paying off their delinquent payments.
- Special Forbearance – this is a written agreement between homeowner and lender/servicer to reduce or suspend payments for a short period of time. When the forbearance period has expired, the homeowner must make regular payments plus an additional amount…just like the repayment plan above.
Freddie Mac’s Form of Forbearance Agreements
Freddie Mac’s workout solutions are very similar to Fannie Mae’s, however, they differ slightly in their structure.
Reinstatement – The loan is brought current by making full payment of all arrearages. This allows the homeowner to recover and be current with mortgage payments
- Full Reinstatement – this solution pays back all delinquent payments plus all accelerated interest, advances for insurance and tax escrow accounts, legal costs, court fees and any other incurred expenses.
- Partial Reinstatement – this will allow the homeowner to pay a portion of the total delinquent payments and establish a repayment plan for the balance. In order to avoid foreclosure, a 12 month payment plan is usually granted.
Relief Options – These solutions are focused on paying back the arrearages but not modifying the mortgage or allowing for the sale or transfer of the house.
Repayment Plan – this plan will allow the homeowner to continue to make regular payments along with an additional amount added to cover the arrearages.
Short-Term Forbearance – this solution is the same as Fannie Mae’s Special Forbearance. It will allow the homeowner to suspend or reduce the payments for a short period of time.