Lender devises creative way to avoid foreclosure


June 19, 1994|By Kenneth R. Harney

Washington -- You're four months behind on your mortgage payments -- over $4,000 in the hole -- because your spouse was laid off. The phone rings, and it's the mortgage company again.

L But the message this time borders on the incredible: Instead

of threats of foreclosure, your lender offers to pay a big chunk of what you owe, in hard cash. Even better, it will refinance you to a lower rate that you can afford with your diminished income.

Sound too good to be true? Not for participants in a little-publicized but highly significant series of pilot programs now under way. The results are so encouraging, says the large mortgage company sponsoring it, that the concept is likely to go nationwide soon, and could become a new industry standard in borrower-lender relations. Even consumer advocates are praising the idea. Gale Cincotta, the Chicago-based community activist, says, "This is really important. Even if you run into trouble, your lender doesn't have to be the bad guy who's going to take your home away."

Here's what's happening. Hundreds of delinquent borrowers in seven large metropolitan areas are being screened by PNC Mortgage -- formerly Sears Mortgage Corp. -- to see whether they fit into its fledgling "Safe at Home" financial assistance program. PNC is the country's eighth-largest mortgage originator, and services over 460,000 home loans.

If a borrower has maintained a relatively good payment record for several years but suddenly gets hit with an "unforeseen circumstance" -- a divorce, death of a spouse, a plant closing or even a natural disaster -- PNC may step in with a one-time-only dose of financial relief.

Take the case this spring of a Baltimore couple in their late 30s. The husband and wife had closed on a home mortgage of $106,350 in 1990 at 10 percent interest. Monthly principal, interest and escrow payments came to $1,075. Last year, however, the couple ran into financial trouble because of an employment change. They just couldn't handle all the bills coming due on their diminished income.

They missed a couple of mortgage payments, and got the predictable warnings from their lender, PNC. Ultimately they fell five months behind. But rather than force them out of their house, PNC made them a shocking offer: Come up with about $2,000 of the $5,000-plus that you are in arrears, and we'll chip in the rest. We'll also do a professional inspection of your home -- free -- and put you into a whole new loan carrying an 8 1/2 percent rate and a $961 monthly payment that we know you have the income to handle.

All the borrowers had to do was fill out an application and attend a homeowner financial counseling session of several hours run by a Baltimore nonprofit group.

Similar refinancing arrangements have been negotiated this spring in Los Angeles, Philadelphia, St. Louis, Atlanta, Boston and Chicago. The essential ingredients are the same: If homeowners facing foreclosure can be kept from such a disaster through the investment of two or three thousand dollars, then it is a worthwhile expenditure.

Why? Because foreclosure not only hurts the consumer, it's also costly to the lender as well -- often racking up thousands of dollars in losses and fees in connection with the transaction. Though many foreclosures can't be prevented -- the owners have no real prospects of handling their debt loads even at reduced monthly payments -- others simply need to be thrown a lifeline.

"We see this as a win-win type of situation," says Walter C. Klein, chairman and CEO of Vernon Hills, Ill.-based PNC Mortgage. The homeowners keep their property, on renegotiated terms. And PNC cures delinquencies that could lose the company substantial sums. On top of that, says Klein, "the entire local community wins" because the house doesn't get sold at a bargain price on the courthouse steps.

The new program was developed with the help of a nonprofit, consumer-oriented group -- the Illinois Public Action Housing Policy Center-- and has been strongly endorsed by Cincotta's organization, the National Training and Information Center (NTIC). The latter group works with consumer housing counseling agencies across the country, primarily in urban communities.

Ironically, one of PNC's biggest hurdles in initiating its concept was rampant disbelief among its own clients that a private lender would offer them cash when they were seriously delinquent on their loans.

PNC employees would call prospective beneficiaries several times without getting responses, recalls Klein. "They'd leave messages explaining what we wanted to do and you could just hear what [the customers] were saying: 'Yeah, sure, you want to give us money -- there's gotta be a gimmick. This couldn't be [the mortgage company] whose calls we've been avoiding all these months.' "

Limited to qualified PNC customers in the seven pilot markets, the program is expected to expand nationwide to the firm's 460,000 borrower base in the coming months.

Consumer advocates like Cincotta hope other major lenders will adopt it. Even if they're not attuned to the social benefits, she says, "They should understand the payoff at the bottom line."

Send letters to Kenneth R. Harney care of the Washington Post Writers Group, 1150 15th St., N.W., Washington, D.C. 20071.

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