Trouble trouble what to do

Given the high tide of delinquencies, foreclosures, and bankruptcies rolling over the country, mortgage lenders have decided to approach troubled borrowers with a velvet glove and an olive branch rather than the iron fist of lawyers and legal process. The Mortgage Banker has published a variety of articles with titles such as "Compassionate Servicing," "Rescuing Latepay-ers," "The Delinquency Story," and "Wells Fargo Implements [Freddie Mac's] Early Resolution System."

Borrowers Won't Listen

Borrowers all too often rebuff their lender's peaceful problem solving. They won't open their mail or answer their telephone. They turn tail against anything or anyone that looks like or sounds like a collection effort.

To counter this head-in-the-sand tendency, First Nationwide Mortgage disguised its "please come in and talk with us" letters. Instead of offensive pink past-due notices, First Nationwide placed its pleas for workout in envelopes that look like wedding invitations.

Even that effort gained only a 13 percent reply rate. Creative collection beat the ordinary response rate of 2 percent, but 13 percent still leaves a majority of troubled borrowers neck deep with the water rising.

What to Do

When you suspect that you might encounter financial difficulties, call your mortgage servicer. Better to put on a life jacket before you need it than wait until your lungs are filled and you're going down for the third time.

"If you know you're going to face emergency bills, we can suspend your payments until you recover," says Paula Edwards, a workout and loss mitigation official with Countrywide Home Loans. "But we can't do anything if we don't know. I've helped all sorts of people—mechanics, doctors, judges, professors. But only when they call."

Although early beats late, late beats never. Among all borrowers who seek peaceful resolution, 85 percent could nearly see the courthouse steps. By then, their legal costs, past-due payments, late fees, and escrow shortages had piled up to magnify the difficulties of resolution.

To succeed in workout, a borrower needs two things: a willingness to eventually pay, and some foreseeable and provable steady source of income. For a look at major workout alternatives, please read through Figure 10.1.

In any workout, the lender will weigh many factors. "We don't want to set you up to fail," says John Plaisted, a workout specialist with Countrywide.

But to achieve a workout, loan counselors must discover the reasons for the delinquency. They must judge whether the borrowers care enough to keep their property. They must talk to borrowers.

Lenders fight toughest when they are forced into battle. To avoid hostilities and begin a peaceful—though often stressful—workout, borrowers must candidly, truthfully, and realistically disclose all personal and financial events that are likely to impact their life during the foreseeable future.

Before a lender enters into a mortgage workout, it will first try to learn the real cause of the problem. It will then judge whether the borrower can recover. With this assessment, the lender chooses one or more workout alternatives:

  • Forbearance. This alternative can succeed when the borrower suffers a temporary setback. Normally, a lender will agree to reduce or suspend payments for 6 to 24 months; then when the borrower can afford it, a new payment is figured that eventually gets the borrower caught up.
  • Modification. When good faith borrowers suffer a permanent setback, lenders might rewrite the loan to extend the terms, lower the interest rate, or both. This loan modification will reduce monthly payments so that the borrower can meet the new budget.
  • Advances. When a borrower has missed fewer than 12 payments on an FHA/VA loan, the lender may advance funds to bring the loan current. In return, the borrower signs a note promising to pay back the advance—but without interest.
  • Deed in lieu of foreclosure. Rather than suffer the stigma, costs, and stress of foreclosure, some deep-in-debt borrowers convey their property to their lender. If the lender accepts, it releases the borrower from personal liability under their mortgage and promissory note.

In some cases, the FHA will pay borrowers $500 to $1,000 to move out of a property and deed it to FHA.

  • Short sale (short payoff). Borrowers might want to sell their property, but they owe more than the property is worth. To facilitate a sale, a lender may accept a payoff that's less than the outstanding balance on its loan.
  • VA refunding. The Department of Veterans Affairs (VA) sometimes buys delinquent VA loans from lenders and takes over the servicing. The VA then tries to structure a loan plan that the delinquent borrower can handle.

Figure 10.1 Alternatives for Workouts

If at some time you find yourself unable to pay your mortgage(s), immediately notify your lender (i.e., the mortgage servicer). Do not try to make ends meet by running up cash advance balances on your credit cards. Far better, ask your lender to help you craft a solution that will conserve—not destroy—your finances and your life.

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