In a recent article, the Wall Street Journal  focuses on how rising unemployment is affecting stabilization efforts, and what is currently being considered to address the issue specifically pertaining to forbearance.

Unemployment Vexes Foreclosure Plan

Rising unemployment is complicating the Obama administration's effort to reduce foreclosures and stabilize the housing market.

The first wave of mortgage delinquencies was sparked by borrowers who took out subprime mortgages and other risky loans that became unaffordable, causing them to fall behind on their monthly payments. But the current wave is increasingly driven by unemployment or underemployment, economists and housing counselors say

The Obama foreclosure-prevention plan was "built around the subprime crisis model, not the unemployment crisis model," said Michael van Zalingen, director of homeownership services for the nonprofit Neighborhood Housing Services of Chicago.

The Obama program provides financial incentives to mortgage-servicing companies and investors to reduce mortgage-related payments to 31% of monthly income.

But many borrowers don't have sufficient income to qualify for a loan modification under the plan. Mr. van Zalingen said roughly 45% of the more than 900 borrowers who sought help at two recent counseling events would fall into that category even if their interest rate were dropped to 2% and their loan term were extended to 40 years.

Many of those unqualified borrowers suffered job losses or a reduction in income, Mr. van Zalingen said. Roughly 27% of borrowers who called the mortgage industry's national "Hope Hotline" in the second quarter of 2009 cited unemployment as the primary or secondary reason for their mortgage problems, up from 9.7% in the second quarter of 2008.

The administration is considering making changes to the loan-modification program to address the current employment landscape.

"We recognize that unemployment is a significant complicating factor," said Deputy Assistant Treasury Secretary Seth Wheeler. "We are studying what more we can do."

The Obama program currently calls on mortgage-servicing companies to consider options other than loan modifications for borrowers who can't qualify for them for a range of reasons, including loss of income.

One possibility is a forbearance plan that allows borrowers to hold off from making mortgage payments for several months while they look for work. But there are no specific guidelines for determining who should get forbearance and for how long.

The administration is weighing whether it should provide more specific guidelines for how mortgage companies should work with borrowers who have lost their jobs but are believed to be good candidates for re-employment. It is also considering providing additional incentives to encourage servicers to offer forbearance plans.

Several Federal Reserve economists, meanwhile, have suggested the government pay a share of the mortgage payment, for a limited time, for borrowers who see a significant disruption in their income.

Other options include providing short-term loans to borrowers who have lost jobs, or giving special treatment to borrowers likely to become re-employed soon. Administration officials haven't taken a position on these options, and said each brings its own challenges.

The rise in unemployment-related delinquencies comes as 20 mortgage-servicing companies are ramping up efforts to modify troubled loans under the Obama plan. More than 200,000 borrowers have received modification offers under the program, which could help as many as four million borrowers, according to administration officials.

Housing counselors say that modifications under the plan are producing substantial payment reductions for some borrowers. But they complain that many are being kept waiting for help as mortgage-servicing companies get up to speed.

In the meantime, there are signs the overall mortgage-delinquency problem is getting worse. The percentage of mortgage loans that were at least 30 days past due but not yet in foreclosure climbed to a record 8.49% in May, up from 8.08% in April and 5.66% a year earlier, according to LPS Applied Analytics.