off foreclosure: You don't have to lose your home
Curing a foreclosure is a little like curing cancer -- the
sooner you catch it, the better your chance of survival.
on in the default process, consumers can still come back from the brink because
they haven't missed more than one or two monthly payments and their lenders haven't
spent too much trying to get them back in line. But as the foreclosure process
moves along, the size of the delinquent debt owed and the bank legal costs that
customers are usually charged mount. Borrowers who try to ignore their financial
problems -- and their lenders' phone calls -- will likely lose their homes.
as you know you're going to miss your first mortgage payment, that's when we need
to be notified. We can explain to the consumer what to expect throughout the process,"
says John Lawrence, manager of borrower counseling services with Wells Fargo &
Co.'s mortgage division. "Say they've lost their job or some other type of hardship
has gone on. We can give them time to help get their lives back in order.
longer that you go -- and if you're going into a foreclosure process, there are
other fees and costs involved in that -- it does make it more difficult to ultimately
get the problem solved."
looking to help
Solving foreclosures is what companies want to do these
days, too, according to lending experts. Fannie Mae, Freddie Mac and the mortgage
servicers responsible for administering borrower loans have all attempted to boost
loan "workouts" or "cures" and reduce the number of homes that end up in the dreaded
"REO," or "Real Estate Owned," category.
should be solicitous at every step of the process to try to help the borrower
stay in the home," says Danny Smith, manager of loss mitigation at Fannie Mae.
"The sooner that there is a connection there between the two of them to work something
out on the loan, the more likely the borrower is to stay in the home."
banks and investors aren't just doing this out of the kindness of their hearts.
Workouts look better from a public relations standpoint and usually cost thousands
of dollars less than full foreclosures and home repossessions. They also keep
lenders from having to slog through the foreclosure process, which in some states
can drag on for a year and a half or more. Regardless of lenders' motivations,
the trend toward increased workouts means borrowers have a much better chance
today of avoiding eviction than in the past.
yourself in the bank's shoes," says Mory Brenner, a Pittsfield, Mass. attorney
who works with borrowers in foreclosure. "The person has missed one payment or
two payments and you know in your state that if the thing goes to foreclosure,
you're going to be looking at getting no payments for a year and a half and at
the end of the year and a half, now you're going to have to market a distressed
"Are you going to want to help the borrower
make their payments? Absolutely."The workout
wheel starts turning once a borrower payment becomes 16 days late. The servicer
will try to get in touch with the customer at that point and figure out a way
to bring the payment current. After the first payment becomes 30 days delinquent
and the next month's payments look to be in jeopardy, collection attempts get
more and more serious. By about 90 or 100 days, the servicer will refer the mortgage
to an attorney or other representative, who will initiate the formal foreclosure
During these few months, the servicer will offer the borrower two primary options
to cure the mortgage -- a repayment plan and a loan modification. With a repayment
plan, the company agrees to tack, say, half the amount of the first missed payment
onto each of the next subsequent two payments. These plans provide some breathing
room for borrowers with short-term financial problems, such as expensive car repairs
that make it too difficult to pay the mortgage for one month.
a more serious case, the customer may have already missed two or three payments
and owes a couple thousand dollars in lender legal fees. The servicer will still
try to arrange a repayment schedule. But the borrower will likely have to pay
a third to a half of the delinquent amount upfront, and then pay off a portion
of the remaining balance each month for a year or more.
a repayment plan, the borrower agrees to do a payment and a half, a payment and
a quarter, etc., for whatever number of months is needed to make that loan current,"
says Fannie Mae's Smith.
Loan modifications go
a step further and they're designed for customers that can't afford repayment
plans. In a modification, the servicer actually adjusts the terms of the loan
to make it affordable. It may lengthen the amortization schedule or lower the
interest rate to cut the monthly payments, or roll the past due amount into the
loan and re-amortize the new balance so the borrower can pay the additional debt
back over time.
If the customer has a more serious
financial problem, such as a longer-term job loss followed by rehire at another
company that pays much less, alternatives still exist. The servicer may agree
to help the borrower get rid of the house via a pre-foreclosure sale. In more
dire circumstances, the servicer will agree to a "short sale." In such sales,
the lender lets the borrower sell the house for less than the outstanding loan
amount, takes the proceeds and forgives any remaining overage. Banks are willing
to do so because they often lose less on these deals than they do in foreclosures.
companies may consider a "short refinance," too. With these, the lender agrees
to forgive some of the debt and refinance the rest into a new loan. That way,
it still gets more money than it would by foreclosing. One last way to bail out
of a home before things get really ugly is a "deed in lieu of foreclosure" agreement.
The borrower surrenders the property deed to the bank and it sells it.
he has no prospects and there's no way he can save his property, getting with
someone who can help him sell it as quickly as possible" is the best choice, says
Michael Drawdy, first vice president at Countrywide Credit Industries Inc.'s mortgage
If all else fails
who just need some extra time to sell their homes, on the other hand, should consider
refinancing via a "hard
money" loan. While they have very high rates and fees, the loans, usually
from private individuals, can give people the couple extra months they need to
find buyers. Most banks will be more than happy to take cash no matter how close
it is to the foreclosure sale too. If a relative steps in with $10,000 to bring
the loan current, a borrower can usually just hand it to the lender and go back
to business as usual.
Consumers who can't use any of these methods still have some choices.
A debtor who can afford the normal monthly mortgage payment, but can't afford
to make up the delinquent amount and legal fees because the lender is proposing
a relatively stringent repayment plan, may want to consider filing Chapter 13
Doing so temporarily halts the foreclosure process and can force the mortgage
lender to accept a more borrower-friendly repayment plan, such as one that grants
five years to repay the amount in arrears rather than one or two.
"The banks are happy to do
it," says Brenner, the attorney. "Remember, they don't want your house. The bank
just reinstates the loan back to the old terms, takes all the arrearage, all the
legal fees, all the late fees and they pay it off and you get back on track."
all this sounds simple, borrowers shouldn't be lulled into complacency. Lenders
want your money. Just because they're negotiating with you, it doesn't mean they
won't turn around and foreclose if that's the way they lose the least money.
the 90th to 120th day is when the loan is reported to foreclosure and from that
point on, two things are going on simultaneously. It's sort of a 'good cop, bad
cop' " routine, says Phil Comeau, vice president for servicing and billing operations
at Freddie Mac. "The foreclosure department is moving as quickly as possible to
get to the foreclosure sale and the loss mitigation department is working with
the borrower to try to do a workout. If the workout can be done before the foreclosure
sale takes place, then everybody wins and the workout is done. If that can't be
done, the foreclosure sale is held.
of a race to the finish line."
Following the same
logic, customers should try to negotiate the best deal they can get without feeling
guilty. Someone whose property has fallen in value below the mortgage amount because
of a neighborhood decline, for example, should consider pushing for a short sale
or short refinance rather than a repayment plan. That way, the borrower doesn't
pay more money than necessary. Nevertheless, the best way for consumers to get
out of foreclosure without racking up extensive legal bills and ruining their
credit histories is to start working on a solution before their problems get out
"In no case should people take the step
that is most often taken in this situation," Brenner says. "That is to stick your
head in the sand and ignore it."