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Foreclosure Prevention
By Mary Sit
H omeowners who skip payments on their mortgage because of temporary financial setbacks often have more help available to them than they realize.
Mortgage counselors say many homeowners live from paycheck to paycheck without a budget. When a financial crisis strikes, they lack the financial resources to handle it. Some will pay smaller credit card bills or a cable TV bill but ignore the larger mortgage payment.
"They just don't know what to do. Some people feel intimidated. A lot of people don't understand the mortgage process and what is involved,'' says Nancy Socol, director of education at the Consumer Credit Counseling Service of Massachustts Inc., a 22-year-old nonprofit counseling service in Boston.
But falling more than 30 days behind in a mortgage payment is "courting disaster,'' warns Andrew E. Howarth, associate executive director at Rural Housing Improvement Inc., a nonprofit housing agency in Winchendon, which serves central Massachusetts.
Mortgage counselors say most people encounter problems paying their mortgage because of job layoffs, divorce or illness in the family. Companies continue to restructure to stem financial losses. Jeremy Rifkin writes in October's Mother Jones magazine that "while corporate profits are heading through the roof, average families struggle to keep a roof over their heads.'' Rifkin predicts a deep recession, pointing out a decrease in manufacturing jobs and payrolls and a decline in consumer confidence.
Mortgage Information Corp. of San Francisco, which monitors the loans of about 16 million homeowners across the nation, says delinquencies on new mortgages closed last year are increasing. In fact, loans closed in 1994 are performing three times worse than those closed the year before. Dan Feshbach, president of the firm, blames low down payments of less than 20 percent for the alarming increase.
"When homeowners are in trouble they need to be honest and call their lenders immediately. If you are upfront with us and come to us, we will be more receptive to working with you,'' says Roberta Sydney, senior vice president of BayBank's Mortgage Corp.
For example, about 30 customers are participating in a customized, partial payment plan that allows partial payment of the monthly amount for a short period of time, usually three months. BayBank will assess late charges and record it on their credit report. After three months, customers begin paying the full monthly amount due, plus a portion of the amount they need to make up when from the three months of partial payments. When they close the gap, usually in 10 or 12 months, Sydney says the late charges and credit notation are erased. The program is successful with 90 percent of its participants.
"Most lenders are quite reasonable to work with, even if they are just servicing the loans, since most of the loans have been sold on the secondary market,'' says Howarth. "If you retain your credibility, you have more ability to negotiate with the bank than you may suspect.''
He says about half of his clients can't be helped because they come in too late for help or because their economic problems are too overwhelming.
Terri Richman, executive director of the National Housing Mortgage Counseling Centers in Boston, soon opening in Connecticut, says consumers need to learn to become more skillful money managers by understanding how to allocate their money. Too often, "it's a matter of robbing Peter to pay Paul, and when funds get a little too low, then both Peter and Paul run out of money." Instead, she counsels consumers to keep track of actual expenses as far back as they can recall - two to five years. Then they need to take a portion of the monthly expense and set that aside in a separate bank account - or envelope - for unexpected expenses. If total expenses are $2,400 a month, a person should be setting aside $100 a month, says Richman. "Prepare in advance, so whan an unexpected expense occurs, it's not a disaster,'' says Richman.
Prevention is the best strategy, agrees Howarth. "Don't let yourself get behind. If you income is declining and your circumstance changing, change your lifestyle now, rather than waiting for the disaster to happen,'' says Howarth.
When homeowners must decide which bills to pay first, they should always pay secured debt first - such as payments on one's home or car - before credit card debt. "Many homeowners at risk of losing their homes also have credit card debt. The majority are current on their credit cards and behind on their mortgage. Although the goal is to pay off all the debt, when you're at risk of losing your home, you need to focus on prioritizing debts,'' advises Richman. "With secured debt, they can take your home. With unsecured debt, they're not going to take the shirt off your back.''
Too often the aggressive collection tactics of credit card companies convince consumers to pay credit card balances before they pay mortgage payments, she adds.
Here are some strategies they can use to help prevent foreclosure for those homeowners who are already behind on their payments:
Escrow account. Some counseling centers will open an escrow account and accept monthly payments, based on a client's budget. They will then negotiate with a lender, crafting a deal in which the lender will accept the funds accumulated in the escrow fund as a significant downpayment toward repaying the amount in arrears. The account also serves another purpose: It helps consumers rebuild credibility, showing they can make consistent payments again.
Restructuring the loan. This option refinances the balance due on a mortgage. One way to restructure is to refinance without paying any cash in a so-called "no cash out'' transaction. Let's say, for instance, you purchased a house five years ago for $100,000 at 8 percent interest. You are paying $735 a month in mortgage payments. Five years later, if you refinance the balance of $95,000 - at the same interest rate - your monthly payments would decline to $697 a month, says Howarth.
If borrowers have at least 15 percent equity in their homes, they can restructure their loan by taking the amount in arears and rolling it into the mortgage amount.
Deed in lieu of foreclosure. If a homeowner cannot recover financially - for example, a two-income family becomes a one-income household through death or divorce - the homeowner can let the lender sell the house without an expensive and formal process of foreclosure. Foreclosures typically cost lenders around $3,000, says John Heerwagen, former chairman of the Massachusetts Mortgage Bankers Association.
"It saves everybody a lot of money and a lot of grief,'' says Heerwagen.
Mary Sit is a former business writer at the Boston Globe and now writes from Taiwan and Boston.