For millions of Americans, the dream of homeownership is turning into a nightmare.
All across the country, people who stretched their finances to buy the biggest house possible, assuming they could refinance or sell if they ran into trouble, are running out of options as interest rates rise and housing prices stagnate.
When you miss a mortgage payment, it's only natural to ignore the late notices and stop answering the phone. But that's the worst thing you can do. By avoiding the problem, you risk not only losing your home but also irreparably damaging your credit.
The fact is, lenders don't want to repossess your house -- it's expensive and time-consuming. Most will do anything possible to avoid it, since they're unlikely to make a profit when they turn around and sell it. The rising number of bad mortgages only makes lenders that much more willing to try to work out a loan.
If you contact the lender
you get too far behind on your payments, there might be a number of options available to "work out" the loan. In some cases, the lender might be willing to add the past-due amount into the loan, giving you time to catch up. Or they might adjust the interest rate or payment period, at least temporarily, to help make your monthly bills more manageable.
"It isn't in anyone's interest for a loan to go into foreclosure," says
spokesman Alfred King.
Fannie Mae doesn't lend money; it buys mortgages from lenders and insures them. The loans are then repackaged into mortgage-backed securities and sold to investors. When borrowers fall behind on their payments, the housing agency is on the hook for the interest these bonds pay.
King says Fannie Mae encourages the companies that service the loans it guarantees to do anything they can to avoid foreclosure. It provides them with software to help identify the borrowers most at risk and pays bonuses for working out loans.
Unfortunately, servicers find more than half of foreclosures are "no contact," meaning that the lender is unable to get in touch with the borrower to discuss the situation.
An alarming number of people are finding themselves in these straits. Realtytrac, an online marketplace for foreclosed properties, says there were 130,786 filings in February -- one for every 884 U.S. households. That puts the U.S. on track for a 33% increase in foreclosures this year compared with 2006.
Many of these people are borrowers with less-than-perfect credit who took out adjustable-rate mortgages or mortgages with low initial "teaser" rates in the hopes that they could refinance or simply sell their homes for a profit before the rates reset, pushing their monthly payments up.
Borrowers like these were targeted at the height of the real estate boom as lenders ran out of more-qualified buyers. Some of them had histories of missing loan payments, but others were first-time homebuyers who simply hadn't had an opportunity to build their credit.
The trouble started as interest rates began to rise while home prices remained flat or even declined. This meant borrowers struggling with payments lost the ability to refinance quickly by tapping into equity that was rising with the value of their property. "You take away appreciation, you take away remedies," says Rick Harper, founder of the Home Education Foundation, a San Francisco-based consumer credit counseling group.
As defaults mount, lenders are tightening their lending standards, making it that much harder for people with blemished credit records to refinance a loan.
Frank (last name withheld), a 38-year-old former construction worker in Garfield Heights, Ohio, ran into trouble when he got hurt on the job and was unable to collect disability. At one point, he was 12 months and $17,000 behind on his mortgage payments, but, with the help of Neighborhood Housing Services of Greater Cleveland, he was able to negotiate a loan modification.
To get the new loan, Frank had to pay $4,000 up front and the balance on his loan jumped to $127,000 from $115,000. NHSC found a program that would cover $3,000 of the upfront costs, provided he stayed up to date on the payments for the next three years. The family had to sell two vehicles they owed money on, and his wife is working three jobs. "We've been on time," he says, "but we've been struggling."
The exact remedies available to a borrower depend on who owns the loan. Banks often sell mortgages to Fannie Mae,
or an investment bank (although the original lender may continue to collect the payments, making them your primary point of contact). Your mortgage could then be repackaged as collateral for a mortgage-backed security. In this case, the loans are held in a trust, which may have rules dictating which remedies are available. According to the Mortgage Bankers Association, some two-thirds of all mortgage loans fall into this category.
In general, however, the kind of assistance available falls into the following three categories:
- Forbearance plans, which allow you to postpone payments, typically for six months, after which time you have to start paying the arrearage.
- Delinquent refinances, in which borrowers who are less than three months behind may be able to refinance at a lower rate, folding the missed payments back into the loan.
- Temporary or permanent modifications of the terms of the loan, such as the interest rate or monthly payment.
In some cases, you may be able to avoid foreclosure by taking out a reverse mortgage, which lets you tap the equity in your home and doesn't have to be repaid until you pass on or sell the house.
Harold Phillips, a broker for American Reverse Mortgage in Saint Lucie County, Fla., says a reverse mortgage should be strongly considered by anyone struggling to make house payments who is old enough to qualify -- 62 -- and has enough equity built up to cover the costs. (As a rule of thumb, he recommends around 30% of the home's value.)
The advantage for seniors is that they can keep their property and stop making payments. Phillips says reverse mortgages should present an attractive option for lenders as well because the lenders can get "paid in full without taking the home." Phillips has helped one borrower avoid foreclosure with a reverse mortgage and is currently working with another one.
Even if you see no way to continue making payments, allowing a foreclosure to happen can be a costly mistake. It can be a credit killer.
Most borrowers would be better off either asking the lender for time to sell the house, even at a discount, through a preforeclosure sale, also known as a short sale, or voluntarily giving the property back to the lender through what is called a "deed in lieu of foreclosure." Both of these options are less damaging to your credit rating than simply abandoning your house, and you may be able to get some assistance with moving expenses.
Borrowers should beware of scam artists who claim they can "save homes" or "rescue mortgages." Some of them are phantom helpers who charge hefty fees to make fruitless phone calls and fill out basic paperwork. Others offer bogus bailouts, encouraging the homeowner to sign over the title and rent from them until they are in better financial shape. Such arrangements almost never work out. Borrowers should only work with credit counselors certified by the Department of Housing and Urban Development. You can find one at the
HUD Web site.
Whatever your decision, you need to take action as soon as you realize there is a problem. The foreclosure process can begin within 90 days of a missed mortgage payment. Depending on the state, within 150 days, the house could be sold. "The further behind you get," Fannie Mae's King says, "the harder it is to find a solution."