Tough Times Series: Lenders, Counselors Help Homeowners Avoid Foreclosure

Joel and Lisa, newly married New Yorkers, didn't believe they had a shot at owning a home until their realtor told them about a payment-option adjustable rate mortgage product that could help them stretch their budget. Now, three years after achieving their dream, the couple is dealing with the nightmare of a monthly payment that jumped from $1,273 to $1,840. They also face the possibility of foreclosure--repossession of their home by the lender--as their finances are stretched to the breaking point.

These borrowers' situation isn't unusual. In an Oct. 30, 2006 press release, RealtyTrac, a real estate Web site and online marketplace for foreclosure properties, reported that the number of properties entering some stage of foreclosure nationwide during the third quarter of 2006 had increased 17% from the previous quarter and 43% from the third quarter of 2005.

Not all of these cases are due to what the industry refers to as "exotic" (nontraditional) loans, of course. Foreclosure is a possibility anytime you get significantly behind in your mortgage payments, whether because of unplanned expenses or a loss of income. But the popularity of the new loans, which typically include terms that create greater risk and fluctuating payments, has put many more borrowers in a precarious position.

If you're a homeowner, the thought of not being able to make the mortgage payments probably tops your list of financial worst-case scenarios. While serious default can lead to foreclosure, a financial bump in the road does not have to spell disaster. You may be surprised to learn that lenders are very eager to help committed and communicative borrowers keep their homes--all you have to do is ask for help.

Early communication crucial

A 2005 survey of more than 2,000 homeowners conducted for Freddie Mac, one of the nation's largest residential mortgage investors, by Roper Public Affairs and Media found a striking statistic: More than half of mortgage borrowers in default (more than one month late on their payment) and in danger of foreclosure never contact the lender for help, and even ignore the lender's attempts to reach them to discuss the situation. The survey results pointed to a variety of reasons why delinquent borrowers were reluctant to talk--from confidence that they could resolve the situation themselves to doubt that the lender could do anything to help them.

"You're doing yourself a service by calling [the lender] to let them know about your situation as soon as you foresee missing a payment," says Rick Harper, housing director for Consumer Credit Counseling Service (CCCS) of San Francisco, one of a number of agencies that Freddie Mac has partnered with to reach delinquent borrowers and work with them to construct a plan that will keep them in their homes.

Bill Merrill, director of nonperforming loans for Freddie Mac, clarifies that it's not just communication, but early communication, that's key to avoiding foreclosure. "[From our research, it] became very apparent that the earlier we can work with the borrower, the greater the chances of success."

Merrill says that a "couple of payments can make all the difference.

"It's a lot easier to fix a situation if you're contacting the lender when you're two payments behind than it is if you're already four payments behind," he explains.

You can find contact information for your lender or the servicer, which collects mortgage payments on behalf of the lender, on your monthly billing statement or in your payment coupon book.

To ensure your conversation with the lender representative is as productive as possible, prepare for the call by answering these questions:

What is the situation? How have your finances changed? Do you have documentation to support your explanation for falling behind on the mortgage--a medical note or proof of unemployment benefits, for example?

What is the prognosis? Is the change in your situation temporary, long term, or permanent? What efforts have you made to get back on track? What changes do you expect in the future?

What outcome are you looking for? Do you want to keep the home? What kind of payment plan would be realistic? Are there any particular solutions you have in mind?

How committed are you to resolving the problem? Will you communicate with the lender openly and consistently? Will you complete all forms and tasks by the deadline given? Will you keep all promises you make and see the process through to the end?

Harper advises going into the call also knowing how much equity you have in the home and what your monthly income and expenses look like. The lender will need your financial information to devise a realistic solution.

If your situation isn't easily resolved during your initial call or soon after, ask the lender about the foreclosure timeline in your state--when would the foreclosure sale take place and what is the last day you could stop the sale? BorrowSmart, a nonprofit foundation that educates home equity borrowers about how to make wise choices, provides state-specific information about the foreclosure process on its Web site.

During the process, keep a log of all communications. Follow up any requests you make by phone with a letter, and make sure all agreements are put in writing. And stay in the property, since you may not qualify for certain types of assistance if you move out.

Lenders' "workout" programs give owners options

Legitimate, reputable lenders--as opposed to predatory lenders, who are intentionally deceptive or discriminatory--want to avoid foreclosures, which are both costly and time-consuming for them. Many, if not most, have special programs that provide options to financially strapped customers.

Freddie Mac, which requires its servicers to do whatever is feasible to keep borrowers in their homes, makes a variety of workout options available to its borrowers, including: Reinstatement, which requires you to pay the lender the entire past-due amount plus all late fees and penalties by an agreed-upon date. Repayment plan, which allows you to add an additional amount of money to your regular monthly payment until you make up the past-due amount you owe. Forbearance, which is a formal agreement that temporarily reduces or delays payments. Loan modification, which involves changing one or more of the terms of the mortgage to make payments more manageable.

(Freddie Mac describes these and other foreclosure prevention options in greater detail on the Avoiding Foreclosure page of the company's Web site.)

What are the odds of your successfully avoiding foreclosure with one of these workouts? That, of course, will depend on your situation. However, a 2004 Freddie Mac study concluded that repayment plans could lower the probability of home loss by 80% among all borrowers.

While not every lender offers all these options, and some, such as the Federal Housing Administration (FHA) and Veterans Administration (VA), may offer different or additional ones, virtually all reputable lenders have some tools to help borrowers in a bind. You and the representative you speak with will determine together which, if any, of the lender's programs will get you back on track.

Housing counselors provide one-on-one default, predefault help

Housing counseling agencies approved by the U.S. Department of Housing and Urban Development (HUD) to provide default or delinquency counseling are another source of help for borrowers already behind on payments and those still current but who believe they may miss a payment soon.

Freddie Mac's Merrill suggests contacting a counselor first if you haven't missed a loan payment but foresee having payment problems soon. That's because many housing counseling agencies also are nonprofit credit counseling services. As such, they can look at your entire financial picture and point out ways to increase income, reduce expenses, or otherwise improve your cash flow. In some cases, a counselor can enroll you in an agency-administered debt management plan that could reduce your monthly payments to other creditors, which may be just what it takes to keep you current on your loan without ever having to contact the lender. If you already have spoken to the lender and arranged a repayment plan, a debt-management plan may give you some breathing room in your budget.

If you have already missed a mortgage payment, Merrill says you should contact the lender first, and then contact a counselor. In addition to helping you prepare for a discussion about workout options with your lender, a counselor can help you weigh your options when you can't, or don't want to, keep the property. For example, if you do not have enough time and equity to sell the house and pay off your debt before the foreclosure sale, you may have to consider more complex methods of avoiding foreclosure.

Some of your alternatives, such as a "short sale" or a "deed-in-lieu" (of foreclosure), carry potential consequences, such as damage to your credit report, a tax liability (if the lender forgives any of your debt that amount may be treated as income), a deficiency judgment (for any amount due that the lender does not receive), or loss of equity. Still, one of these may be the best solution for you, and a counselor can help you sort through the advantages and disadvantages of each option.

Of course, any borrower who feels uncomfortable talking directly with the lender should skip that step and go straight to a HUD-approved housing counseling agency for help, even if he or she already has missed a payment.

"Borrowers are clearly more trusting of a counselor," says Merrill, who encourages homeowners to take advantage of the "nonthreatening environment" that a counseling agency provides.

Harper, whose agency counsels thousands of homeowners each year about how to prevent foreclosure, sees firsthand how a housing counselor, as a disinterested third party, can help lenders and borrowers succeed.

"I think counselors can help dispel the myths [about lenders and foreclosure], and certainly they are more likely to engage the family to work with them because the embarrassment issue isn't present," says Harper. Embarrassment was cited by some participants in the Freddie Mac/Roper survey as one of the reasons they didn't contact their lender.

"As counselors, we aren't asking for the money, and that alone separates us from the lender."

If you haven't already received a letter from your lender referring you to a HUD-approved housing counseling agency, you can find one yourself on the HUD Web site or by calling 800-569-4287 (800-877-8339/TDD). Be sure the agency you choose provides mortgage delinquency and default counseling (as opposed to, say, only home-buyer education). Housing and credit counseling services are usually free or low cost.

Given that even borrowers with the best intentions can experience a setback, it's crucial that all homeowners understand their options and responsibilities for keeping their home if they run into payment problems. Housing counseling and lender programs can offer real and effective solutions for avoiding foreclosure in what you might consider a hopeless situation--if you call.

Of course, the best way to prevent foreclosure is to protect yourself and your home even before you sign the loan documents:

Make sure you understand all the terms of your loan--including if and when the payment could increase and how high it could go; Think twice about any loan that allows negative amortization; Resist the temptation to overextend yourself even if you get approved for the financing; and Build up an emergency fund that could tide you over for a few months.

Without the worry of defaulting on your loan, homeownership can be everything you dreamed of.

Published July 7, 2008