FDIC pushes mortgage help for jobless

Buyers of failed banks who get assistance from the agency should consider giving forbearance plans to unemployed borrowers.

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By Tami Luhby, CNNMoney.com senior writer

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NEW YORK (CNNMoney.com) -- Some unemployed homeowners at risk for foreclosure could get a temporary break on their mortgage payments under a plan being pushed by the FDIC.

The Federal Deposit Insurance Corp. said on Friday it is encouraging certain banks to reduce mortgage payments for the unemployed or underemployed for at least six months.

Overall, relatively few of the unemployed will benefit from this recommendation because the effort would only apply to a handful of institutions. Specifically, it would affect those that bought failed banks and participate in loss-share agreements with the FDIC. In such deals, the agency covers some of the losses incurred on the assets of the failed banks. Some 53 institutions, mainly regional or community banks, have entered into such arrangements since January 2008.

"With more Americans suffering through unemployment or cuts in their paychecks, we believe it is crucial to offer a helping hand to avoid unnecessary and costly foreclosures," said Sheila Bair, FDIC chairman, who has led the efforts to have loan modifications be based on income.

The expanding unemployment rolls have long vexed policymakers focused on stabilizing the housing market. Existing foreclosure-prevention programs, including the president's loan modification plan, generally do not help the jobless because they don't have enough income to sustain even reduced monthly payments.

Administration officials have said they are exploring ways to help the unemployed -- including through reduced payments, typically callled forbearance plans.

"This feature is still being assessed, along with many others, as possible HAMP extensions," said a Housing and Urban Development Department official, referring to the president's Home Affordable Modification Program.

Housing advocates said they approved of the FDIC's effort.

"It's in everybody's interest to give people time to get back on their feet," said Kathleen Day, spokeswoman for the Center for Responsible Lending.

While many servicers have offered forbearance plans in the past, fewer are these days. That's because financial institutions no longer feel that borrowers will be able to land a comparable job within a few months.

Assisting the unemployed

Citigroup is one of the few banks that has implemented a plan to help the jobless during the housing crisis. The bank will lower the payments of eligible borrowers to an average of $500 a month for three months.

Under the FDIC's recommendation, unemployed or underemployed borrowers would have their payments reduced to an affordable level for at least six months.

"This gives them a bridge period," said Michael Krimminger, a special adviser to the agency chairman.

Unlike a typical forbearance plan, where the arrears would have to be paid back within a year, the FDIC endorses allowing borrowers to catch up over the life of the loan.

Borrowers who cannot afford their payments once they get jobs would be considered for a loan modification program approved by the FDIC, which includes the president's plan. Eligible borrowers could have their monthly payments reduced to 31% of their pre-tax income if doing so would cost less than foreclosing on the home.

Banks in loss-share agreements must participate in such modification programs, according to the FDIC. Both modification and forbearance plans could ultimately save the FDIC money if they reduce losses from foreclosure. To top of page

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