The Real Deal New York

Ken Harney – Avoiding mortgage defaults

November 16, 2007
By Ken Harney

Though the possibility might seem remote, what would happen if you suffered a drastic loss of household income, and then fell way behind on your home mortgage payments?

After two months of missed mortgage payments, your house could be well along on the icy slope to foreclosure. Do you have any idea how you would pull yourself out of that nightmare spiral?

Before answering, consider this: New consumer research reveals that a shocking 61 percent of homeowners who fall behind on their payments have no clue about the array of foreclosure-avoidance options now readily available to them. I’m talking about the first and foremost go-to source for home loan delinquency relief: the mortgage company that services your account.

The servicer earns its money by collecting your payments, maintaining the records on your account, and staying in touch with you on behalf of the lender or investor who owns your note. More importantly, in recent years, the giants of the mortgage industry – congressionally chartered Freddie Mac and Fannie Mae and the government’s largest home loan insurer, the Federal Housing Administration – all have begun encouraging or requiring servicers to help borrowers avoid foreclosure.

They’ve done this in large part for self-interested business reasons – they lose tens of thousands of dollars on average with every foreclosure. But they’ve done it for social policy reasons as well. They recognize the disastrous personal and financial consequences that often accompany the loss of a home to foreclosure. How are servicers prepared to help? Main techniques include:

“Forbearance” arrangements where the mortgage company allows a borrower to pay less than the full amount owed per month, or even pay nothing.

“Reinstatements” that permit delinquent homeowners to balance out their accounts with the mortgage company at some specified date in the future, typically by paying a lump sum.

“Repayment” plans that allow partial contributions of arrears over an extended period of time, often as add-ons to the regular monthly payment.

“Loan modifications” that change the basic terms of a mortgage account. Typically these involve conversion of ARMs into more affordable fixed-rate loans, rolling all missed payments onto the existing loan balance, or lengthening the term of the mortgage itself, giving the borrower more years to pay.

All these techniques have the same effect: Once a delinquent homeowner agrees to get involved, the foreclosure clock stops ticking. Freddie Mac says that between 2000 and 2004, more than 176,000 financially distressed homeowners managed to avoid foreclosure by signing up for one or another of these plans. Fannie Mae and the FHA confirm that thousands of their customers have done the same.

Yet new survey research conducted by Freddie Mac and polling firm Roper Public Affairs has found that the widespread availability of foreclosure-avoidance measures through servicers is a big secret to most homeowners. In a sample of 2,031 homeowners, the study found that many of them see no reason to expect help from the mortgage company for missed payments.

Others say they wouldn’t talk to the servicer because they’re too embarrassed or scared to do so. Nearly one out of five delinquent borrowers said they didn’t contact their servicers because they figured they could solve their problems on their own. And 7 percent didn’t get in touch because they didn’t have money to make up the arrears.

In light of Freddie Mac’s surprising poll results, spread the word in 2006: Foreclosure is no longer the inevitable result when a homeowner gets into financial distress. It’s only inevitable in cases where income loss is so severe and so long-term that no amount of workout, forbearance or rejiggering the note can save the house.

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