Falling behind? Tell your mortgage servicer
More homeowners are falling behind in their
If you're delinquent in your payments -- or expect
to be -- the best thing to do is to contact the mortgage servicer
"They should call right away rather than waiting
for a late charge notice to come out," says Tom Drennan, executive
vice president for mortgages at Astoria Federal Savings on Long
Island. "Part of our business is not only collecting mortgages,
but also insuring that customers we deal with will be future customers."
Lenders say they're not out to get borrowers. It costs
a lot of money to foreclose on a house. When borrowers suffer temporary
financial setbacks, lenders prefer to cut them some slack.
"Our goal is to keep them in the home,"
says Tom Johnson, director of default operations for Wells Fargo
Home Mortgage. "I lose money on each home that we foreclose
on. It's not a sound business practice to flush loans into foreclosure.
Plus, it's not particularly ethical, when you can help them."
Other mortgage executives repeat that message: Lenders
lose money on foreclosures, so they try to avoid seizing homes and
throwing out deadbeat borrowers. Nevertheless, late payments and
foreclosures were up from April through June, according to the Mortgage
Nationwide, 4.77 percent of mortgage borrowers were
at least 30 days past due in the second quarter, according to the
MBA. That's up from a 4.65 percent delinquency rate in the January-through-March
period. Foreclosures were up slightly, too: Lenders initiated foreclosure
proceedings for 40 of every 10,000 mortgages in the second quarter,
compared to 37 per 10,000 mortgages in the first quarter.
"Delinquencies are clearly related to unemployment,"
says Doug Duncan, senior economist with the MBA. He believes that
the economy has emerged from last year's weak recession, but that
unemployment still might increase slightly before year's end. That
means it probably will be a while before mortgage delinquencies
Duncan says the foreclosure rate is higher than expected,
maybe because lenders are underwriting slightly riskier loans than
they did 11 years ago when the last recession occurred. Nowadays
it's common to get a mortgage with just a 3 percent or 5 percent
down payment -- and those loans are riskier than 20 percent down
payment loans that were the norm in the past.
Lenders, investors, borrowers and the government have
concluded that increasing the homeownership rate is worth more foreclosures.
This is especially true with the Bush Administration, which is trying
aggressively to promote homeownership among minorities and low-income
Loan servicers have procedures for dealing with delinquent
borrowers. "We go into almost another underwriting process,"
says David Gibson, first vice president of default risk management
for Washington Mutual. The lender looks at the borrower's payment
history, income and spending. A customer who has never been late
with a payment, then calls to say she has been laid off and is willing
to show copies of bank statements, is likely to get cooperation
from the lender.
That cooperation can take several forms. Most lenders
offer a forbearance program for people with temporary financial
problems such as unemployment or unexpected medical bills. "Let's
say you have a two-income family and one of them is laid off,"
says Johnson of Wells Fargo. "We could be in a position where
for 90 days we would suspend payments completely." At the end
of 90 days the lender and borrower could agree on a repayment plan
"where we can go, in some circumstances, up to 18 months to
allow them to get caught up. We can spread that out fairly generously."
Or a lender might modify the loan when the lender
gets back on his financial feet. A modification is sort of like
a refinance, except the loan payoff date remains the same and there
are no closing costs -- just a fee that's relatively low compared
to closing costs.
"Let's say they're unemployed for eight months
and they owed $1,000 a month in mortgage payments," says Kim
Lott, first vice president of loan servicing for Countrywide Home
Loans. The borrower finally finds a job "and we think they
can start making payments at about the same rate again. They owe
$8,000 and can't make up for it, so we take that $8,000 and add
it to the current principal of their loan and reamortize it."
Maybe even at a lower rate.
Sometimes the problem is permanent, and the borrower
has to move out or get kicked out of the house. "If the income
isn't there, we recommend sale of the property or assistance from
someone, so if they do have equity, they can retain it," Gibson
As a next-to-last resort, lenders will allow "short
sales," in which the home's sale price isn't enough to repay
the full balance of the loan. In a short sale, the lender walks
away with a loss on the loan and doesn't sue the borrower for reimbursement
for the loss.
The last resort is foreclosure, where the lender and
borrower lose money and the borrower earns a long-lasting negative
entry in the credit report. No one wants that. And the first step
toward avoiding foreclosure is picking up the phone.
"The most important thing to do is call the lender
-- communicate. Tell them what's going on," Lott says.