Foreclosure can often be avoided with a call

Nation's Housing

Nation's Housing

December 25, 2005|By KENNETH HARNEY

Though the possibility might seem remote, what would happen if you got sick or suffered a drastic loss of household income in 2006, and then fell seriously behind on your home mortgage payments?

Think about that - even for just a moment - because none of us is immune from unforeseen patches of rough luck.

After two months of missed mortgage payments, your house could be well along on the icy slope to foreclosure.

Do you have any idea how you would pull yourself out of that nightmare spiral?

Before answering, consider this: New consumer research reveals that 61 percent of homeowners who fall behind on their payments have no clue about the array of foreclosure-avoidance options readily available to them.

I'm not talking about hiring lawyers, filing for bankruptcy or turning over their mortgage to con artists who claim they'll solve all the problems if you'll just give them the title to the house.

I'm talking about the first and foremost go-to source for home-loan delinquency relief: the mortgage company that services your account every month.

The servicer earns its money by collecting your payments, maintaining the records on your account, and staying in touch with you on behalf of the lender or investor who owns your note. More importantly, in recent years the giants of the mortgage industry - congressionally chartered investors Freddie Mac and Fannie Mae and the government's largest home loan insurer, the Federal Housing Administration (FHA) - all have begun encouraging or requiring the servicer to bend over backward to avoid foreclosures when borrowers fall behind.

They've done this in large part for self-interested business reasons - they lose tens of thousands of dollars on average with every foreclosure. But they've done it for social policy reasons as well. They recognize the disastrous personal and financial consequences that often accompany the loss of a home to foreclosure. If they can help homeowners keep a roof over their heads, they win and the homeowners win.

How are servicers prepared to bend over backward? Their main techniques include:

"Forbearance" arrangements where the mortgage company allows a borrower to pay less than the full amount owed per month, or even pay nothing, depending upon the situation.

"Reinstatements" that permit delinquent homeowners to balance out their accounts with the mortgage company at some specified date in the future, typically by paying a lump sum.

"Repayment" plans that allow partial contributions of arrears over an extended period of time, often as add-ons to the regular monthly payment.

"Loan modifications" that change the basic terms of a mortgage account. Typically these involve conversion of adjustable-rate mortgages into more affordable fixed-rate loans, rolling all missed payments onto the existing loan balance, or lengthening the term of the mortgage itself, giving the borrower more years to pay off the debt.

All these techniques have the same effect: Once a delinquent homeowner agrees to get involved, the foreclosure clock stops ticking. Freddie Mac says that between 2000 and 2004, more than 176,000 financially distressed homeowners managed to avoid foreclosure by signing up for one or another of these plans. Fannie Mae and the FHA confirm that thousands of their customers have done the same.

Yet new survey research conducted by Freddie Mac and polling firm Roper Public Affairs has found that the widespread availability of foreclosure-avoidance measures through the servicer is a big secret to most homeowners, whether they've faced financial problems or not. In a sample of 2,031 adult homeowners, the study found that many of them see no reason to expect help from the mortgage company when they miss payments.

Others say they wouldn't talk to the servicer because they're too embarrassed or scared to do so. Nearly 1 of 5 delinquent borrowers said they didn't contact the servicer because they figured they could solve the problem on their own. And 7 percent didn't get in touch because they didn't have the money on hand to make up the arrears.

Hello? Lack of cash on hand is precisely the reason to contact the mortgage company to see if things can be worked out. Otherwise this month's missed payment morphs into next month's missed payment and pretty soon you're so far behind you might never catch up.

In light of Freddie Mac's surprising poll results, spread the word in 2006: Foreclosure is no longer the inevitable result when a homeowner gets into financial distress. It's only inevitable in cases where income loss is so severe and so long-term that no amount of forbearance or rejiggering of the note can save the house.

For all lesser financial jams, pick up the phone. Call the servicer. Explain the problem and work it out in a win-win solution.

kenharney@earthlink.net.

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