A MILESTONE that has potentially huge importance for anyone who owns a home and pays a mortgage was reached without fanfare last month: For the first time, all three of the biggest players in the American home-loan field kept significantly more of their seriously delinquent borrowers in their houses, rather than forcing them out through foreclosure.
The Federal Housing Administration, Fannie Mae and Freddie Mac all managed to "work out" more delinquencies with nonpaying borrowers during the past year - through loan modifications and other forbearance techniques - than they foreclosed upon.
FHA was especially impressive: In fiscal 2002, for the first time in its 60-plus year history, it paid more insurance claims designed to help delinquent borrowers retain their houses than claims associated with foreclosures.
As recently as the mid-1990s, the vast majority of homeowners who were seriously delinquent on their mortgage payments ended up in foreclosure. But today, the proportion has fallen to less than half. All three mortgage industry leaders - FHA, Fannie and Freddie - have instituted national "loss-mitigation" programs whereby seriously delinquent borrowers have their loan terms reshaped rather than proceed to foreclosure.
Though all three loss-mitigation programs are designed to keep homeowners in their houses, they have enormous financial benefits for the mortgage companies as well. This past year, FHA, the government's prime mortgage insurance program for first-time and moderate-income buyers, paid out $5.5 billion in claims on 64,000 foreclosures. Yet it paid out just $98 million to help keep 73,000 financially troubled borrowers - who might otherwise have ended up in costly foreclosures - in their homes with recast loans.
For decades, says Joseph McCloskey, FHA's top loss-mitigation specialist, "the assumption was that if a loan went into default, the homeowners were on their own. If they could pull themselves out of whatever trouble they were in, fine. But if not - they were headed for foreclosure."
Now, says McCloskey, under a mandate from Congress, the agency reaches out to borrowers through mortgage servicers to deal with financial problems early, before the missed payments grow too heavy to handle.
Fannie Mae and Freddie Mac, private companies chartered by Congress, also have aggressive programs designed to custom-craft solutions for delinquent borrowers before they go over the cliff. Phil Comeau, a Freddie Mac vice president in charge of loss-mitigation nationwide, says that in the mid-1990s, 70 percent to 75 percent of seriously delinquent borrowers lost their homes to repay their debts. Today, by contrast, over 50 percent are able to enter loss-mitigation programs and avoid foreclosure.
Fannie Mae's director of loss-mitigation, Danny Smith, says 93 percent of delinquent borrowers who participate in the company's resolution program are able to remain in their houses and eventually repay their arrearages. Over 52 percent of seriously delinquent borrowers now opt for workouts.
Last year alone, says Smith, of the nearly 31,000 borrowers who fell seriously behind on their mortgages, 16,000 resolved their problems without foreclosure. As recently as 1997, just one in three of Fannie Mae's "problem" borrowers were able to avoid foreclosure or loss of their homes.
What are the options available in workouts? There are several basic plans offered to FHA borrowers, depending on the severity of their problems:
Special forbearance: When a homeowner falls behind on payments because of temporary job loss or illness, FHA may agree to accept lower, more affordable payments from the borrower for a period of months. But once the homeowner's cash flow improves, the arrearages must be made up through gradually increasing payments. Roughly 47 percent of FHA loss-mitigation cases are handled this way, according to McCloskey.
Loan modifications: When the financial problem is longer term, but the borrower's reduced cash flow is relatively stable, FHA may modify the terms of the mortgage itself, including even lowering the interest rate. To pay off the debt, the term of the mortgage may be extended and the arrearages may be capitalized - paid off in small monthly amounts during the remaining term of the loan. About a third of FHA workouts take this form.
Partial claims: When the unpaid amounts are high but the borrower looks like a solid long-term bet to pay, FHA may itself pay arrearages in a lump sum insurance claim. The borrowers are still responsible for paying that back when they sell the house at some time in the future.
The upshot of all this for financially troubled mortgage borrowers: Be aware that thanks to the widespread adoption of loss-mitigation programs by major lenders and insurers, the first step to saving your house is now clearer than ever before. When you see a problem on the horizon, contact your mortgage servicer immediately.
Don't let the situation spiral out of control. Work it out early. And keep your home.
Kenneth R. Harney is a syndicated columnist. His e-mail address is firstname.lastname@example.org. Send letters care of The Washington Post Writers Group, 1150 15th St. N.W., Washington 20071.