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Late on Your Mortgage? How to Keep Your Home

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By Ruth Mantell, MarketWatch

RISMEDIA, August 14, 2007—(MarketWatch)—As a growing number of borrowers fall behind on their mortgage payments, the smartest move they can make is to contact their lender, mortgage-industry experts and consumer advocates say.

These days, there’s more incentive for companies to work with borrowers to avoid foreclosure: Regulators and lawmakers, prompted by troubles in the mortgage market, are encouraging companies to assist troubled borrowers.

Major lenders in the subprime mortgage market have agreed to a set of principles proposed by Sen. Chris Dodd, D-Conn., calling for servicers to try to modify loans before the interest-rate reset if borrowers will be unable to afford the new payments, among other actions.

Lenders also have a financial incentive to keep you in your home: They can lose tens of thousands of dollars for each loan that goes into foreclosure, according to a June report from the Office of the Comptroller of the Currency.

Also, a bank’s reputation can be sullied by borrowers who go into foreclosure.
“We’re in unusual times. The problems that are being experienced throughout the market are so severe that many lenders might be willing to be more flexible,” said Allen Fishbein, director of credit and housing policy with the Consumer Federation of America.

“There’s a recognition that run-ups in foreclosures do not benefit lenders and could be devastating to the surrounding communities,” he said.

More borrowers are having trouble making their payments, some with interest rates that are resetting and rising, and some are defaulting on their mortgages. This trend is hitting the markets as Wall Street firms rack up losses from securities tied to these mortgages, and financing options decline.

The delinquency rate for mortgages on one-to-four-unit residential properties reached 4.84% in the first quarter (on a seasonally adjusted basis), up 43 basis points from the same period in the prior year, according to the Mortgage Bankers Association.

Contacting your lender before your situation seriously deteriorates will improve the chances that you keep your home. Consider this: Half of borrowers whose homes go into foreclosure never talk to their servicer, while the majority of loans that start repayment plans will cure within 18 months, according to the OCC report.

“Effective foreclosure prevention relies on increasing the amount of contact between servicers and delinquent borrowers,” according to the OCC.

Others agreed. “The disappointing thing is that some borrowers are very reluctant to talk to servicers they see as collection agencies, so they are cutting themselves off from possible solutions to keep them in their home,” Fishbein said.
To get back on track with payments and avoid foreclosure, here are some tips from experts.

Tips to get back on track

Call your loan servicer: By doing so, you can try to arrange workout options that will keep you in your home. A lender may be able to modify the loan to make it more affordable in the long term.

One note: The OCC report notes that one obstacle to the process is that some lenders sell their mortgage loans into packages of mortgage-backed securities. The resulting contracts often “contain restrictions on actions a servicer may take in conjunction with loan workouts,” the report said, thus “placing limitations on the percentage of loans in a securitized pool that may be modified.”

To find out the status of your loan, you’ll need to ask your servicer to work with you. If you have an adjustable-rate mortgage, ask about refinancing into a lower cost, fixed-rate loan. That option could be particularly important for borrowers who may have been wrongly given higher-cost loans. Loan modifications can also reduce the principal balance outstanding and extend the term of the loan.

Some other options include repayment plans that increase your regular payments until you pay back the delinquency. A forbearance arrangement suspends payments or can allow you to make a reduced payment for a few months.

For some, holding onto their homes may be impossible. For those people it’s just as important to reach out to their servicer to avoid foreclosures, which can seriously damage your credit and linger of your credit report for seven to 10 years, according to MBA.
Servicers can help troubled borrowers sell their home. They can also accept a house deed, or a short sale payment in which you hand over the proceeds from selling the home, even if it’s less than the amount still owed on your mortgage.

Get in touch with a counseling agency

Borrowers should also consider getting in touch with a housing counselor to help either as an intermediary or to offer advice. These services are free or very inexpensive. Experts recommend the hotline at (888) 995-HOPE.

“The landscape of nonprofits that are willing to act as go-betweens with the homeowner and the servicer has increased. They are much more engaged than they were a year ago” said Douglas Robinson, a spokesman with nonprofit NeighborWorks America, which focuses on community-based revitalization.

Serious illness, losing your job and marital problems are the main causes of delinquency, foreclosure and bankruptcy, according to MBA. Counselors can help at-risk borrowers who may be reluctant to step forward because they are embarrassed about their situation or simply overwhelmed and confused.

“If you are a homeowner you think that the process is just going to continue to be complicated. Admit you have trouble and ask for assistance from either your servicer or local nonprofit,” Robinson said. “It’s a phone call that can really assuage your fears, provide you with a moment of calm, of guidance.”

Laurie Maggiano, deputy director of the single-family asset management office with the Department of Housing and Urban Development, recommended that borrowers in trouble should avoid foreclosure bailout schemes. The schemes can turn out to be good to be true, with borrowers unwittingly deeding away their home.

Instead, Maggiano said borrowers need to take a hard look at their financial situation and be honest with their lenders.

“Be honest and candid and tell your lender everything you know about your situation, because if they have the full story they can help you,” she said.

Strapped homeowners also need to be honest with themselves, make some tough decisions, and stop spending as soon as possible on luxury items, Maggiano said.
“Try to figure out how you can reprioritize your spending so that you can make your mortgage your priority,” she said. “The credit card companies are not going to evict you from your home.”

Ruth Mantell is a MarketWatch reporter based in Washington.

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