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How to Work out a Problem Mortgage with Your Lender

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By Lew Sichelman

RISMEDIA, August 21, 2007—(MarketWatch)—Question: During the loss mitigation process, how can the lender lose contact with the borrower or deny the borrower based on a previous bankruptcy? Where can the borrower get information that explains the loss mitigation process and determine when the lender is failing to deal with the borrower in an ethical manner? Is there ever a time when the loss mitigation process would be ongoing for two years without allowing the borrower to make payments on the loan?

Answer: For the uninitiated, loss mitigation is the process by which a lender or its agent attempts to work with a delinquent borrower to bring payments current. However, under the federal bankruptcy code, a loan servicer — the company which administers the mortgage on behalf of its owner, which is typically an unseen investor — cannot talk to a borrower in bankruptcy without first getting permission from the borrower’s bankruptcy attorney.

According to spokesman Brad German of Freddie Mac, if the loan is owned by his company, “we’d want our lien released from the bankruptcy if the borrower and the borrower’s attorney asked for a workout.” At the same time, German says as far as Freddie Mac is concerned, a previously discharged bankruptcy should have no effect on a borrower’s ability to obtain a “workout,” assuming one is feasible. But other investors may have their own rules.

Each investor writes its own policies for loss mitigation, and some are more tolerant than others. So borrowers should call their servicer or check out their servicer’s Web site to learn as much as possible about the policies affecting their mortgage.

Borrowers can contact a responsible counseling agency, such as Consumer Credit Counseling Services or NeighborWorks America, for guidance on the workout process. These and other community organizations may also offer financial literacy classes that use Freddie Mac’s “CreditSmart” curriculum (www.freddiemac.com/creditsmart), which also covers the workout process.

German doesn’t understand why a servicer would prevent a borrower from making payments, and neither do I. We also don’t understand the two-year period you mention.

But let’s say a delinquent borrower made only a partial payment. In that case, the servicer would contact the borrower and try to negotiate a workout. If agreement on a workout plan is reached, the servicer would keep the partial payment in conjunction with the repayment process. But if a workout is not feasible, the partial payment would be returned and a foreclosure proceeding would be initiated.

Even after the repossession process is started, though, the servicer can continue to work with the borrower to explore options for a short sale (selling the house for less than what is owed) or deed-in-lieu foreclosure (handing the keys to the house and moving out). Also understand that the foreclosure process can be a long, drawn-out affair in some jurisdictions.

Here are some Internet sites that might be helpful for borrowers in general and those with Freddie Mac owned loans:

- Freddie Mac – Avoiding Foreclosure for Borrowers ( www.freddiemac.com/avoiding_foreclosure)
- NeighborWorks Center for Foreclosure Solutions ( www.nw.org/network/neighborworksProgs/foreclosuresolutions/default.asp)
- Freddie Mac’s Responsible Servicing Guidelines ( www.freddiemac.com/service/msp/responsible_practices.html)

Q: I’m a newly married 27-year-old from Kansas City. I, unfortunately, have been caught in the middle of the “credit” game. Being newly married, my wife and I want to buy a house in the near future. However, I feel it is all but impossible because of my credit history. I need help!!! I have tried some of the tactics mentioned in various articles, but to little or no avail. I was wondering if you could at the very least refer me to a company that can help me get my credit history cleaned up so that my wife and I can start from a clean slate, or as close to a clean slate as possible. Trenton Adams.

A: Contact the National Foundation for Credit Counseling to locate a reputable non-profit credit counseling organization near you. Use NFCC’s national locator line or ZIP code locator.

With more than 100 member agencies and more than 900 local offices throughout the country, NFCC is the national voice for its nonprofit, mission driven, community-based agency members. Founded in 1951, the Silver Spring, Md.-based organization is the nation’s largest and longest serving national nonprofit credit counseling organization.

It’s mission is to promote the national agenda for financially responsible behavior and build capacity for its members to deliver the highest quality financial education and counseling services.

NFCC members annually help two million consumers, and more than a third of them are said to be able to manage their debt on their own after receiving financial education and counseling.

While many NFCC members are known as Consumer Credit Counseling Services, an increasing number operate under other names. But all members can be identified by the NFCC member seal, which represents accredited agencies with high standards, ethical practices, certified counselors and policies and practices which help consumers achieve financial stability.

Every client of NFCC member agencies receives comprehensive money management services based on individual needs. Members provide free and/or affordable services, which are offered in-person or by phone. Many agencies also offer Web-based services.

Housing counseling also is provided by many members for consumers who want to purchase homes and those who have fallen behind on their mortgage payments.

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