Avoiding foreclosure: Five important steps to takePeter G. Millerforeclosure, statistics, refinance, delinquent payments
There's no doubt that owning a home is part of the American
dream - a marker in life that shows economic accomplishment and
social status. Yet it's also true that even households with great
credit are sometimes threatened with bad breaks, hard times and the
potential for foreclosure.
"Foreclosure is a terrible event," said James J. Saccacio, CEO
of RealtyTrac, a national online foreclosure marketplace. "In the
first quarter of 2006, we found that foreclosures nationwide were
up 72 percent when compared with a year earlier. The tragedy is
that many of these foreclosures could actually have been avoided.
How? You have to know how the game is played."
Top 10 metro foreclosure ratesQ2 2006
Metro area Percentage of households Number of households
National average
in foreclosure for every foreclosure
1. Indianapolis 0.987 101 3.532
2. Atlanta 0.904 111 3.235
3. Dallas 0.891 112 3.188
4. Denver 0.784 128 2.807
5. Austin, Texas 0.706 142 2.528
6. Houston 0.691 145 2.472
7. Memphis 0.682 147 2.440
8. Stockton, Calif. 0.649 154 2.323
9. Salt Lake City 0.607 165 2.171
10. San Antonio 0.601 166 2.151
Few people who buy real estate pay cash for their homes.
Instead, the common path is to buy property with little down and
finance the balance. The money that's been borrowed is then paid
back over time or when the property is sold or refinanced.
In most cases, real estate financing is the cheapest money you
can borrow. The reason for low mortgage rates is that real estate
loans traditionally represent little risk to lenders. At any given
time, only about one percent of all real estate loans are in the
process of foreclosure, which means the vast majority of home loans
are on track to being paid off on time.
And, of the homes that enter the foreclosure process because of
delinquent payments, most don't end up on the auction block or
repossessed by the bank. Why is this? The answer is fairly simple.
Like you, lenders don't want to be involved with foreclosures. Even
with mortgage insurance, lenders can experience huge losses every
time a home is foreclosed. No less important, many lenders are
overseen by state and federal regulators. To regulators,
foreclosures are evidence of poor management and a need to tighten
lending standards. To lenders, more regulator oversight means
tougher lending requirements and reduced profits.
This is good news for homeowners facing short-term financial
distress, because it means that most lenders will allow them some
wiggle room to right their financial ships and avoid
foreclosure.
But what happens if a more permanent tragedy (like your employer
shutting down or your community being hit by a hurricane, tornado
or other natural disaster) affects your ability to pay your monthly
mortgage? And what can you do to avoid foreclosure if you've lost a
job, gotten sick, had an accident, lost a spouse, or now face
divorce or separation? Here are the five key steps to avoid
foreclosure, even in these types of situations.
Step one: Don't panic
Most households have a surprising array of assets that can be used
to make payments and delay foreclosure. Unemployment insurance,
disability insurance and savings are each potential cash sources.
Household budgets can be slashed. Big, expensive cars can be traded
in for cash. Retirement funds are often available, though be aware
that withdrawals may result in penalties and additional income
taxes.
Saccacio said that borrowers should not forget about friends,
family, co-workers, religious congregations and community groups.
"You may be surprised by the number of people and groups who will
lend a hand when times are tough," he said.
Step two: Deal with late and missed
payments
If problems cannot be delayed or deferred and mortgage payments
will be late or unpaid, then you must contact the lender as soon as
possible.
"The usual way to start such contacts is for you, or your
attorney or legal clinic to call the phone number used to service
your loan," said Saccacio. "Most often, you can ask for the loss
mitigation department. Be sure you have your loan number handy, as
well as the latest statement, with your mortgage balance and other
information."
At this point, your goal is to help the lender create a workout
agreement that effectively modifies your mortgage so that a
foreclosure can be avoided.
"Since most lenders also want to avoid foreclosures, everyone
has a reason to work together," Saccacio said.
A group of national lenders has set up a national hotline run by
the Homeownership Preservation Foundation for homeowners in
default. If you are in default or in danger of default, you can
call (888) 995-4673 to get advice on how to avoid foreclosure.
Step three: Look at workout options
Once you enter into discussions with a lender or a servicer, any
number of options is open. While lenders are typically not required
to modify loan arrangements, many will. The usual choices include
the following:
-A deed in lieu of foreclosure: In this situation, the lender
accepts the return of your title. "But, be aware that the lender
may not have to accept your title," said Saccacio. "Also, in many
states, a lender may sue for any loss, ding your credit report and
report any uncollected loss to the IRS as taxable income to
you."
-Claim advance: If you bought with less than 20 percent down, then
either the loan is self-insured by the lender or you have private
mortgage insurance (PMI). In some cases, PMI companies will provide
a cash advance to bring the loan current - money that is sometimes
interest free and need not be repaid for several years.
-Disasters: Most lenders, but not all, will provide substantial
relief in the face of hurricanes, earthquakes and other terrible
events. Typical measures include a suspension of late fees, no late
payment reports to credit bureaus, a pause in foreclosure actions
and modified payment schedules. To get such benefits, you must
contact the lender as soon as possible after the disaster.
-Federal Housing Administration (FHA) loans: If you financed with
a loan guaranteed by the FHA, call (800) 569-4287 to reach a U.S.
Department of Housing and Urban Development-approved housing
counseling agency for assistance and advice.
-Forbearance: This is a temporary change in mortgage terms, such
as the right to skip a payment or make smaller payments for up to a
year.
-Modification: "This option should be considered when the borrower
experiences difficulty making regular mortgage payments as a result
of a permanent or long-term financial hardship," said Liz Urquhart
of AIG United Guaranty, a PMI company. "Reducing an above-market
interest rate to a market rate and/or extending the original terms
of the note may enable the borrower to continue making payments
and, thus, avoid foreclosure. Permanent interest rate reductions
appeal most to borrowers, but even a temporary rate reduction of
one to three years can provide substantial help."
-Private mortgage insurers: Mortgage insurance companies typically
require lenders to begin foreclosure proceedings once a delinquency
reaches 150 days or when a sixth missed payment is due. However,
such requirements may be waived in areas impacted by natural
disasters and for other reasons.
-Re-amortization: In this case, your missed payment is added to
the loan balance. This brings your account current. However, said
Saccacio, "since your debt has increased, future monthly payments
may be larger unless the lender agrees to lengthen the loan
term."
-Refunding: If you have a loan backed by the Department of
Veterans Affairs (VA), the VA may buy the loan from your lender and
take over the servicing. If you have the ability to make mortgage
payments but your loan holder has decided it cannot extend further
forbearance or a repayment plan, you may qualify for refunding,
according to the VA.
-Reinstatement: Imagine you missed two or three monthly payments.
With a reinstatement, or what is also known as a "temporary
indulgence," you can bring your loan current and pay late fees and
other costs, allowing the loan to continue as before the
delinquency.
-Repayment plans: Say you must miss a payment and that each
payment is $1,000. With a repayment plan, you might pay $1,075 a
month until the missing money is repaid.
-Short sale: This is an arrangement where the lender accepts less
than the mortgage debt in satisfaction of the entire loan amount.
It is also called a "compromise agreement" with VA loans. Be
cautious. Saccacio said that in some instances, money not repaid
might be regarded as taxable income. Also, in some cases, lenders
may sue to recover any shortfall.
Step four: Refinance toxic loans
Since 2001, millions of loans with new formats have been issued,
permitting low monthly payments for the first several years of the
loan term and then much higher monthly payments thereafter.
"If you have an option-ARM, an interest-only mortgage or a
negative amortization product and can't make the required monthly
payments, you can lose your home," said Saccacio. Saccacio pointed
out that in some cases, monthly costs for principal and interest
could more than double if the loan resets at a higher rate. He said
that in such situations, switching to a mortgage with monthly costs
that are higher than today, but far lower than next year or the
year after, with current financing, is a smart lending choice.
"There are no conditions under which it's good to lose a home,"
said Saccacio. "If you have to switch loans and go to a mortgage
which now has a bigger monthly payment - and if that means you must
trade in the luxury car for something more modest to save money or
that you need a second job or more hours where you work now -
that's fine. These are much better options than being
homeless."
If you have a loan where soaring payments are a certainty, don't
wait to refinance. Do it now while you have a strong credit profile
and no missed payments.
Step five: Sell the property
In some situations, there is no workout or refinancing option that
can save a property. If a job is lost, medical payments are
overwhelming or mortgage payments are rising to the point of
bankruptcy, the only plausible choice may be to sell the
property.
"You have to be realistic," said Saccacio. "If the situation is
headed downhill, if the situation is worse every month, you have to
protect your interests and sell the property. This is a hard,
difficult choice, but if you sell before foreclosure looms, you'll
get a better price for the property and you'll preserve your credit
standing."
Peter G. Miller is the author of "The Common-Sense Mortgage"
and is syndicated in more than 80 newspapers. He may be reached at
(301) 593-0970 or e-mail
[email protected].
