RISMEDIA, September 11, 2007-(The Wall Street Journal)–As mortgage woes spread, what’s a nervous borrower to do?
Mike Wilt, who lives in Uniontown, Ohio, is trying to figure that out. Wilt, a marketing director for a communications firm, is current on his $180,000 adjustable-rate mortgage—the home’s price when he paid for it. But he says he may soon start to fall behind, as he’s been notified that his interest rate jumped to 11.5% from 8.5% in September, which will cost him an extra $400 a month.
When he tried to refinance back in March, Wilt was turned down for a loan with better terms because of his credit score; not even his boss’s friends from a local bank could help.
“The rules that got me into the original mortgage had changed,” says the 31-year-old, referring to what he perceives as tougher lending standards.
More and more borrowers, many with adjustable-rate loans, are finding themselves in Mr. Wilt’s shoes. Nearly one in five subprime borrowers, or those with poor credit, were 60 days or more past due on payments in June, according to First American LoanPerformance. But the problem is spreading to other homeowners: Also in June, 1.24% of second mortgages for so-called prime borrowers, those with better credit, were 60 days or more late, up from 0.54% in the same month last year. And some 4% Alt-A borrowers, who fall between subprime and prime borrowers, were 60 days or more past due in June, up from 1.25% in the same month last year.
The East Side Organizing Project in Cleveland, which performs foreclosure-prevention counseling for borrowers, has seen a marked increase in professionals using the group’s services in the past two months, including Wilt, as well as teachers, accountants and lawyers, according to Mark Seifert, the group’s executive director.
The government is signaling its concern. Earlier this week, federal and state banking regulators urged lenders and investors to restructure the loans of millions of borrowers at risk of foreclosure, though it is unclear what effect the joint statement will have. Last week, President Bush announced a policy change that would increase by 80,000 the number of borrowers who will qualify for new, better loans that are guaranteed against default by the Federal Housing Administration in 2008, bringing the total to 240,000.
Years ago, when homeowners got loans from local banks, borrowers who couldn’t make their payments could try to negotiate with a familiar face. Now, with many loans “securitized,” or packaged and sold as financial instruments, these conversations are getting a lot tougher. The upshot: Borrowers in trouble may need to pursue other alternatives, including counseling services or legal avenues.
Here’s a guide to some options:
– Call the servicer. If you fear you can’t make your payments, industry experts say, call the company that takes your loan payments, called the mortgage “servicer,” to try to improve your situation. That could mean asking for more time to pay back the loan, getting a lower rate or switching from an adjustable rate to a fixed one.
Servicers are often allowed by the agreements governing loans to renegotiate terms, a process known as a “work-out” or “loss mitigation.” In recent months, with property values declining in many markets, some companies are showing more of a willingness to work out an arrangement with struggling borrowers, according to housing counselors. Larry Litton Jr. , chief executive of Litton Loan Servicing, which services 370,000 mortgage loans nationwide, says the company did 1,400 modifications in August, up from 500 the previous August.
– Talk to a housing counselor. Counselors communicate with servicers on behalf of borrowers and can give advice on how to delay foreclosure. They are available in many cities, and their services often are free. In Iowa, for example, counselors typically first recommend filing a “demand for delay of sheriff’s sale,” which can halt foreclosure for six months to a year, says Jerri Scott , a counselor at the Iowa Citizens for Community Improvement. Counselors can also negotiate for a loan modification with lenders. One possible downside to counseling: Borrowers who are in foreclosure are short on time — in some states they have as little as 60 days before a sale takes place — and many counseling agencies are already swamped. Neighborhood Housing Services of Greater Cleveland, for example, is booked into October. Through their county treasurer’s office, Mary and Joseph Goodman of Ypsilanti, Mich., negotiated a work-out in which their adjustable rate became a fixed rate, saving them from likely foreclosure this summer. The couple, who refinanced for their $210,000 home in 2004, say their broker neglected to tell them the rate would increase in 2005. Their treasurer had gotten help from the National Training and Information Center, which has a network of affiliates that do housing counseling and have access to specific work-out specialists at some lenders. The Department of Housing and Urban Development’s Web site, www.hud.gov , has a nationwide directory of counseling agencies.
– File for bankruptcy. If talking to the servicer doesn’t work, consider Chapter 13 bankruptcy, which can at least delay foreclosure and can force the lender and other creditors to negotiate a payment plan approved by the court. Borrowers can file on their own or with a lawyer. The first option is cheaper, but some borrowers are making errors in the process and not getting approved, says Beth Osthimer , policy director for Neighborhood Legal Services of Los Angeles; then they often have to wait several months before they can reapply.
Hiring a lawyer can help ensure an accurate filing, but two years ago, following changes in bankruptcy laws, prices increased. In Los Angeles, for example, lawyer fees are as high as $4,000 per application, up from around $2,000. Plus, bankruptcy lawyers may have an incentive to push for Chapter 13 to get the fees, when in fact the filing might just prove a costly delay of inevitable loss of the home, says Justin Harelik , a Los Angeles bankruptcy lawyer.
A borrower’s credit score will take a big hit after he or she enters into Chapter 13, but making timely payments can gradually raise it, says Tom Quinn , a vice president at Fair Isaac, developer of the FICO score used by creditors to assess borrowers’ risk. Once a borrower is discharged from bankruptcy, he says, it stays on their credit report for seven to 10 years and will continue to “make you more risky” to creditors.
– Sue. A growing number of private lawyers, with help from consumer-rights groups and legal-aid lawyers, are pursuing legal relief for borrowers who got loans they had little chance of repaying and, the lawyers argue, shouldn’t have been granted. Taking cases on a contingency-fee basis, these lawyers are giving borrowers the chance not only to stop foreclosure and rescind the loan, but also to seek damages for abuses in some cases. The aim is to prove that lenders granted fraudulent or “unconscionable” loans with terms skewed heavily in their favor, or to fight abuses by servicers such as phony fees that cause homeowners to default.
The number of lawyers specializing in this area is still small, and many already have packed caseloads. Melissa Huelsman , a Seattle lawyer who has focused on wrongful-foreclosure litigation since 2001, says her caseload has doubled in the past year to 50 active cases. She is mentoring several local lawyers.
Bill Purdy , a Soquel, Calif., lawyer, first looks for violations of federal statutes such as the Truth in Lending Act, a 1968 law that requires disclosure of key terms of the loan and its costs. “There are tons of illegal loans out there, but nobody’s looking,” Mr. Purdy says. Most cases settle out of court. But courts in states such as West Virginia and California have been most receptive to suits against lenders and servicers, says Margot Saunders of the National Consumer Law Center, which assists attorneys in such suits.
A possible downside to suing: in extremely rare instances, borrowers who lose a suit may get saddled with attorneys’ fees for the lenders. For a list of attorneys specializing in lender/servicer abuses, check www.naca.net , the Web site of the National Association of Consumer Advocates, or call your local legal-aid office or bar association.
– Beware of “foreclosure rescue” scams. Federal and state prosecutors are investigating companies that offer temporary refinancing schemes in which borrowers get to stay in the home but go deeper into debt because the payments to the “rescuer” are higher than their mortgage payments.
Write to Amir Efrati at email@example.com