Facing Foreclosure? Try a Home Loan Workout
Mortgage companies say that the last thing they want to do is foreclose, because seizing a delinquent borrower's house costs money. It follows, then, that the key to keeping the house is to make it less expensive for the lender to work with you than to foreclose. How does one go about working out a plan to keep his or her home? When you fall behind on payments, your chances of getting cooperation from the mortgage servicer are better if you follow these guidelines.
Step-by-step plan for seeking help:
- Respond to the mortgage company's phone calls and letters.
- Seek advice and negotiating help from a third party.
- Figure out if your problem is short-term or long-term.
- Decide what you want and ask for it.
- Document income and expenses; keep all correspondence with the servicer.
- Be persistent in your quest to talk to the right people at the mortgage company.
Respond to the mortgage company's phone calls and letters
The mortgage servicer is the company that collects monthly payments, passes along the payments to the homeowners insurance company and tax collector, and makes phone calls and sends letters when borrowers fall behind. Academic researchers have found that, in about half of foreclosures, the delinquent borrower never talked to the servicer.
"Our biggest challenge is getting folks to respond," says William Rinehart, vice president and chief risk officer for Ocwen Financial Corp., a large servicer of subprime mortgages in West Palm Beach, Fla. Fear, embarrassment and shame keep delinquent borrowers from talking to servicers. "These folks, in many cases, are financially unsophisticated, so the whole process is intimidating to them," Rinehart says. "They feel that if they just ignore it, it will go away." It won't.
Delinquencies and foreclosures have been rising nationwide for more than a year. As mortgage lenders lay off loan officers, mortgage servicers hire debt collectors and loss-mitigation specialists. Ocwen's loan resolution department has 123 full-time employees. A year ago, it had about 70 employees. "We train our collectors to have empathy," says Teresa Bratcher, Ocwen's director of foreclosure prevention. "These people, for the most part, didn't choose the circumstances that they're in."
Tip: Answer the phone and open your mail, but don't agree to any terms until you read the next tip.
Seek advice and negotiating help from a third party
Respond to the mortgage servicer, but don't be rushed into making a promise that you can't keep. Before making a deal with the servicer, describe your situation to an attorney, accountant or a knowledgeable mortgage person. When you are in danger of foreclosure, those are perilous waters and you want to make sure you have a good adviser who can maybe serve as an intermediary to the lender.
Another place to go is a housing counseling agency or a consumer credit counseling service. A good place to start is the NeighborWorks Center for Foreclosure Solutions website. NeighborWorks counselors will make referrals to local agencies. "I urge people to get some kind of help with this process, to the extent that they can," says Michelle Lewis, president of Northwest Counseling Service, an agency in Philadelphia that offers mortgage counseling. "They can go out and do it on their own, but they need to be cautious."
Tip: Choices for guidance include consulting an attorney, a credit counselor or a housing counseling agency.
How one man found help
Northwest Counseling Service helped Bernie Watson keep his rowhouse in the Germantown section of Philadelphia. Watson, who is in his 50s, bought the house in 1990 and refinanced the mortgage in 2000. But he didn't realize that the new servicer wasn't escrowing the property taxes. Taxes went unpaid until the mortgage was sold to another servicer late last year. To get Watson current on his taxes within a year, the new servicer almost tripled his monthly payment, from $532 to $1,436.85, beginning in February.
Watson couldn't afford that, so he sent in as much as he could every month -- "well over $500 a month." He found out later that the servicer applied the entire amount of each payment to the tax bill -- and applied none of it to the loan balance. So even though Watson sent a check each month, the servicer said he was missing all of his payments. Watson got a foreclosure letter, along with an "Act 91 notice," required by Pennsylvania, which provided the names and contact information of housing counseling agencies. He chose Northwest because its office was closest.
Among other ways of helping, Northwest put Watson in contact with Samantha Arens, a housing counselor with the Philadelphia Unemployment Project. She helped Watson get approved for an $11,300 loan from the state's Homeowners' Emergency Mortgage Assistance Program, or HEMAP. Previously, he had been rejected for a loan from HEMAP. The loan made Watson current with his taxes and mortgage. Watson will repay HEMAP $25 per month. At that rate, the loan won't be paid off until Watson is in his 90s; more likely it will be repaid when the house is sold someday. The mortgage problems created, quite literally, a bureaucratic maze: "My bedroom is full of paperwork," Watson says. "You can barely walk in here."
Watson says he lost 40 pounds during the ordeal -- "I couldn't half eat." He suffered sleeplessness and headaches. It's difficult to believe that things would have gone more smoothly without help.
Is your problem short-term or long-term?
Mortgage servicers offer two broad types of workouts, depending upon whether the borrower's troubles are short-term or long-term. Before negotiating with a mortgage servicer, you should know which category your problem belongs to. Sometimes it's easy to know the difference. Rinehart, of Ocwen, comes up with the hypothetical example of someone who confronts having to pay $2,000 for a new car engine. "And now they've got to make a choice between making mortgage payments and their car" that provides transportation to work. That's a short-term problem because the borrower's income doesn't change, and the repair bill is a one-time hit. Temporary disability, resulting in reduced income for a few months or weeks, is another short-term problem.
In other cases, the borrower might become permanently disabled, get divorced or become widowed. Those usually are long-term problems. Throw in a sharply higher rate on an adjustable-rate mortgage, and it can turn into a crisis. Sometimes it's hard to know how long a problem will last. A layoff might result in a one-week job search, or a yearlong hunt. An injury or illness could linger longer than expected. In such cases, it's still a good idea to get in touch with the servicer.
Tip: Each situation is unique. Understand your situation before agreeing to a plan.
Decide what you want and ask for it
For short-term problems, the mortgage company is likely to offer a forbearance. Most commonly, this entails adding a set amount to each month's payment. "They can just keep making payments till they get back on track. That's a forbearance plan," Bratcher says. At Ocwen, a forbearance plan can go as long as 36 months. Lewis says any forbearance agreement should be "forward-moving" -- it should be the full mortgage payment, plus a portion that pays off the arrearage over time. "You don't ever want to go onto a payment plan, particularly if you can afford it, that involves less than a full monthly payment," she says, because you don't want to keep adding to the amount owed.
Longer-term problems that reduce income, such as disability, are sometimes solved by loan modifications. Theoretically, any term of a mortgage may be modified: the rate, the final payoff date, even the amount owed. "Modification is designed for a homeowner who doesn't have future prospects of being able to maintain the current mortgage payment or the projected one, if they're anticipating a rate jump, over the long term," Lewis says. "It is designed for long-term relief, so we know that their income isn't going to change much over the next 20 years." Modifications, Rinehart says, are extreme measures. "And those are measures that we enter into thoughtfully and in a minimum of situations, because, ideally, we're trying to recover the maximum amount of principal and interest for the investor who owns the loan. So modifications are used sparingly." In other cases, the servicer might conclude that foreclosure will lose less of the investor's money than modification would.
Document income and expenses. Keep all correspondence (even the envelopes)
Before negotiating a deal, gather all the information you need, starting with any correspondence from the servicer. "That includes anything unopened, as well," Lewis says. Don't throw away envelopes from the servicer -- postmarks sometimes can make the difference between being eligible or ineligible for relief, Lewis says.
- Collect everything that relates to income and expenses.
- At least 1 month of income
- 3 Years worth of W2s
- 3 - 6 Months of Bank Statements
- All Mortgage Paperwork
- Pull together all bills, paid or not, from the times you were falling behind on the house payments until now.
- Include utilities, auto payments, credit cards, student loans, child support, medical bills.
- Include everything that documents why you fell behind.
- Behind every mortgage delinquency, there's a story. Learn to tell it succinctly.
- Sit down and write out the circumstances that led to the default.
Tip: Be prepared for tough questions. At Ocwen, loss mitigation specialists are taught to ask tactfully, Bratcher says. Example: "Is there a way you can reduce some of those auto expenses?" A counselor at a housing counseling agency might be more direct: "Do you want the Escalade or the house?" Know the answers before the pointed questions are asked.
Be persistent in your quest to talk to the right people at the mortgage company
This last point could just as easily be the first: Make sure you talk to the people at the mortgage servicing company who can help you. A mortgage servicer has two platoons of employees who talk with delinquent borrowers. The first is the collections department, which consists of people who try to pry money out of you and get you current on the payments.
The second group consists of the loss mitigation specialists. These departments go by different names, depending on the servicer, including foreclosure prevention, loan resolution and delinquency customer service. We'll use the most common name for the department: loss mitigation, or loss mit. It can be difficult to get through to the loss mitigation department if collection agents are discouraged from transferring calls. This is one of the benefits of having a helper, such as an attorney or a housing counselor. The first will intimidate bill collectors and the second might have contacts within the loss mit department.
Making the call
When you finally do get through, tell your story, answer the questions about income and expenses, and request an application for forbearance or modification, and say, "I want to know all the things I'm eligible for." "What they'll get back from the lender is a push to get an agreement then and there," Lewis says. Don't agree to anything immediately. "Otherwise, they may agree to something that they cannot afford," Lewis says. "Fill out an application and let the lender make an offer first," and then consider it for 24 hours. Talk it over with an adviser. Accept the offer if it's a good one; otherwise, make a counteroffer.
Plan to arrive at an agreement, but prepare for the unwelcome news that you'll have to move out. If you turn over the deed in lieu of foreclosure, or agree to a short sale (in which the lender lets you sell the house for less than the mortgage balance), or are forced out in a foreclosure action, you'll need to consult a lawyer and maybe an accountant.