Don't allow fear to rule your finances.
If you're delinquent in your mortgage payments -- or expect to be -- the best thing to do is to contact the mortgage servicer quickly.
"They should call right away rather than waiting for a late charge notice to come out," says Tom Drennan, executive vice president for mortgages at Astoria Federal Savings on Long Island. "Part of our business is not only collecting mortgages, but also insuring that customers we deal with will be future customers."
Lenders say they're not out to get borrowers. It costs a lot of money to foreclose on a house. When borrowers suffer temporary financial setbacks, lenders prefer to cut them some slack.
"Our goal is to keep them in the home," says Tom Johnson, director of default operations for Wells Fargo Home Mortgage. "I lose money on each home that we foreclose on. It's not a sound business practice to flush loans into foreclosure. Plus, it's not particularly ethical, when you can help them."
Other mortgage executives repeat that message: Lenders lose money on foreclosures, so they try to avoid seizing homes and throwing out deadbeat borrowers. Nevertheless, late payments and foreclosures climbed in 2002, according to the Mortgage Bankers Association.
Foreclosures on the rise
Nationwide, 4.77 percent of mortgage borrowers were at least 30 days past due in the second quarter, according to the MBA. That's up from a 4.65 percent delinquency rate in the January-through-March period. Foreclosures were up slightly, too: Lenders initiated foreclosure proceedings for 40 of every 10,000 mortgages in the second quarter, compared to 37 per 10,000 mortgages in the first quarter.
"Delinquencies are clearly related to unemployment," says Doug Duncan, senior economist with the MBA. He believes that the economy has emerged from last year's weak recession, but that unemployment still might increase slightly before year's end. That means it probably will be a while before mortgage delinquencies edge down.
Duncan says the foreclosure rate is higher than expected, maybe because lenders are underwriting slightly riskier loans than they did 11 years ago when the last recession occurred. Nowadays it's common to get a mortgage with just a 3 percent or 5 percent down payment -- and those loans are riskier than 20 percent down payment loans that were the norm in the past.
Lenders, investors, borrowers and the government have concluded that increasing the homeownership rate is worth more foreclosures. This is especially true with the Bush Administration, which is trying aggressively to promote homeownership among minorities and low-income people.
Lenders will often work with you
Loan servicers have procedures for dealing with delinquent borrowers. "We go into almost another underwriting process," says David Gibson, first vice president of default risk management for Washington Mutual. The lender looks at the borrower's payment history, income and spending. A customer who has never been late with a payment, then calls to say she has been laid off and is willing to show copies of bank statements, is likely to get cooperation from the lender.
That cooperation can take several forms. Most lenders offer a forbearance program for people with temporary financial problems such as unemployment or unexpected medical bills. "Let's say you have a two-income family and one of them is laid off," says Johnson of Wells Fargo. "We could be in a position where for 90 days we would suspend payments completely." At the end of 90 days the lender and borrower could agree on a repayment plan "where we can go, in some circumstances, up to 18 months to allow them to get caught up. We can spread that out fairly generously."
Or a lender might modify the loan when the lender gets back on his financial feet. A modification is sort of like a refinance, except the loan payoff date remains the same and there are no closing costs -- just a fee that's relatively low compared to closing costs.
"Let's say they're unemployed for eight months and they owed $1,000 a month in mortgage payments," says Kim Lott, first vice president of loan servicing for Countrywide Home Loans. The borrower finally finds a job "and we think they can start making payments at about the same rate again. They owe $8,000 and can't make up for it, so we take that $8,000 and add it to the current principal of their loan and reamortize it." Maybe even at a lower rate.
Sometimes the problem is permanent, and the borrower has to move out or get kicked out of the house. "If the income isn't there, we recommend sale of the property or assistance from someone, so if they do have equity, they can retain it," Gibson says.
As a next-to-last resort, lenders will allow "short sales," in which the home's sale price isn't enough to repay the full balance of the loan. In a short sale, the lender walks away with a loss on the loan and doesn't sue the borrower for reimbursement for the loss.
The last resort is foreclosure, where the lender and borrower lose money and the borrower earns a long-lasting negative entry in the credit report. No one wants that. And the first step toward avoiding foreclosure is picking up the phone.