Homeowners who skip payments on their mortgage because of temporaryfinancial setbacks often have more help available to them than they realize.
Mortgage counselors say many homeowners live from paycheck to paycheckwithout a budget. When a financial crisis strikes, they lack the financialresources to handle it. Some will pay smaller credit card bills or a cableTV 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 CounselingService of Massachustts Inc., a 22-year-old nonprofit counseling servicein Boston.
But falling more than 30 days behind in a mortgage payment is “courtingdisaster,” warns Andrew E. Howarth, associate executive director at RuralHousing Improvement Inc., a nonprofit housing agency in Winchendon, whichserves central Massachusetts.
Mortgage counselors say most people encounter problems paying their mortgagebecause of job layoffs, divorce or illness in the family. Companies continueto restructure to stem financial losses. Jeremy Rifkin writes in October’sMother Jones magazine that “while corporate profits are heading throughthe roof, average families struggle to keep a roof over their heads.” Rifkinpredicts a deep recession, pointing out a decrease in manufacturing jobsand payrolls and a decline in consumer confidence.
Mortgage Information Corp. of San Francisco, which monitors the loansof about 16 million homeowners across the nation, says delinquencies onnew mortgages closed last year are increasing. In fact, loans closed in1994 are performing three times worse than those closed the year before.Dan Feshbach, president of the firm, blames low down payments of less than20 percent for the alarming increase.
“When homeowners are in trouble they need to be honest and calltheir lenders immediately. If you are upfront with us and come to us, wewill be more receptive to working with you,” says Roberta Sydney, seniorvice president of BayBank’s Mortgage Corp.
For example, about 30 customers are participating in a customized, partialpayment plan that allows partial payment of the monthly amount for a shortperiod of time, usually three months. BayBank will assess late charges andrecord it on their credit report. After three months, customers begin payingthe full monthly amount due, plus a portion of the amount they need to makeup 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 notationare erased. The program is successful with 90 percent of its participants.
“Most lenders are quite reasonable to work with, even if they arejust servicing the loans, since most of the loans have been sold on thesecondary 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 intoo late for help or because their economic problems are too overwhelming.
Terri Richman, executive director of the National Housing Mortgage CounselingCenters in Boston, soon opening in Connecticut, says consumers need to learnto become more skillful money managers by understanding how to allocatetheir 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 ofmoney.” Instead, she counsels consumers to keep track of actual expensesas far back as they can recall – two to five years. Then they need to takea 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 amonth, a person should be setting aside $100 a month, says Richman. “Preparein advance, so whan an unexpected expense occurs, it’s not a disaster,”says Richman.
Prevention is the best strategy, agrees Howarth. “Don’t let yourselfget behind. If you income is declining and your circumstance changing, changeyour lifestyle now, rather than waiting for the disaster to happen,” saysHowarth.
When homeowners must decide which bills to pay first, they should alwayspay secured debt first – such as payments on one’s home or car – beforecredit card debt. “Many homeowners at risk of losing their homes alsohave credit card debt. The majority are current on their credit cards andbehind 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 prioritizingdebts,” 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 companiesconvince consumers to pay credit card balances before they pay mortgagepayments, she adds.
Here are some strategies they can use to help prevent foreclosure forthose homeowners who are already behind on their payments:
Escrow account. Some counseling centers will open an escrow account andaccept monthly payments, based on a client’s budget. They will then negotiatewith a lender, crafting a deal in which the lender will accept the fundsaccumulated in the escrow fund as a significant downpayment toward repayingthe amount in arrears. The account also serves another purpose: It helpsconsumers rebuild credibility, showing they can make consistent paymentsagain.
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 purchaseda 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 thebalance of $95,000 – at the same interest rate – your monthly payments woulddecline to $697 a month, says Howarth.
If borrowers have at least 15 percent equity in their homes, they canrestructure their loan by taking the amount in arears and rolling it intothe mortgage amount.
Deed in lieu of foreclosure. If a homeowner cannot recover financially- for example, a two-income family becomes a one-income household throughdeath or divorce – the homeowner can let the lender sell the house withoutan expensive and formal process of foreclosure. Foreclosures typically costlenders around $3,000, says John Heerwagen, former chairman of the MassachusettsMortgage Bankers Association.
“It saves everybody a lot of money and a lot of grief,” says Heerwagen.
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