Curing a foreclosure is a little like curing cancer -- the sooner you catch it, the better your chance of survival.
Early 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 soon 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.
"The 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."
Lenders 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.
"Servicers 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."
Mortgage 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.
"Put 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 property.
"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 process.
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.
In 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.
"In 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.
Some 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.
"If 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 division.
If all else fails ...Borrowers 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 bankruptcy. 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."
While 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.
"Around 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.
"It's sort 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 of hand.
"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."