Do you owe more than your house is worth?
If so, you’re not alone. But don’t despair — a number of workout options are available to struggling homeowners who are willing to pick up the phone and contact their lender.
Question: What do I do when I owe a $450,000 first mortgage and a second at $115,000 — and new houses the same as mine are selling for $500,000? I owe two months on the first and two months on the second, and I cannot pay. What do I do?
Answer: Your situation, and that of thousands of other folks like you, is serious. You are, indeed, in dire straits. You are “under water” by $65,000, not including your selling costs. And you’ll probably have to take less than $500,000 to sell quickly or beat the competition.
But all hope is not lost, at least not yet.
You should contact your lenders right away. If you are like most folks, you aren’t answering the lenders’ mail or returning their phone calls. Most think they don’t need to speak with their lenders about their situation, or think they can take care of their problems, if they recognize them as such, without involving the lender.
But a large percentage also believe their lenders can’t or won’t be any help, or are simply too embarrassed or scared to ring them up. But all these people are wrong — on all counts.
If you are just a deadbeat who can but won’t make your house payments in a timely manner, lenders have nothing to offer but a ride to the courthouse steps. But if you have been a good paying customer, have a good reason why you fell behind, and look as if you’ll be able to get back on your feet, lenders can be plenty of help. The key word is “forbearance.”
Here’s the thing: Lenders don’t want your house, they want you. According to a report I read recently, the costs of foreclosure are enormous. On average, the total cost — including lost interest during the delinquency, foreclosure costs and disposition of the property — ran nearly $59,000, and the situation took about 18 months to resolve. Worse, these figures were five years old. It is probably more expensive now and takes even longer.
At the same time, keeping people in their homes has been found to be far more productive. Indeed, roughly 90% of the loans that are reworked by lenders are likely to “cure” within 18 months. And those borrowers who seek help from their lenders earlier in the process are far more likely to hang on to their places after riding out their financial turbulence than those who seek help later.
What’s more, research shows that the factors originally used by underwriters in trying to predict the likelihood that would-be borrowers will default — credit, collateral and capital — are not nearly as useful when deciding whether to work with customers who are already on the books but are having a tough time meeting their obligations.
Lenders have several workout options up their sleeves:
Partial reinstatement: Under this plan, the borrower would agree to begin making regular payments and make up what is owed in, say, 12 monthly installments over the next year.
Short-term forbearance: Here, the lender will suspend your payments for, say, three months or reduce your payment for six months, and then you’d make up the difference in some kind of repayment plan as described above.
Long-term forbearance: Payments might be suspended for anywhere from four to 12 months, with a corresponding repayment plan to follow.
Loan modification: This would be a permanent change in one or more of your loan’s original terms. The rate might be cut, the payment period extended or both so that the payment once again becomes affordable.
So my advice is to get on the horn right now with your lender. Make sure you talk to the workout department, though, not the collections folks. Though many lenders are training their repo staff to spot people who need a break and hand them off to the right people, most are bill collectors, short and simple. If the person you speak with has no idea what you are talking about, ask to be transferred to the chairman’s or the president’s office. You can bet someone there will know whom to transfer you to.
You don’t need anybody to speak for you, either. So stay away from the growing group of charlatans who are preying on financially distressed homeowners by offering — for a fee, of course — to act as a go-between between you and your lender. They don’t have any more of an inside track than you do.
If you honestly think you need to have someone holding your hand, contact a local credit or homeownership counseling agency. These nonprofits don’t charge a thing. In fact, in some cases, lenders are paying them to go out into their communities to persuade troubled borrowers to contact their lenders.
The Department of Housing and Urban Development has a list of government-approved counselors on its Web site. Also try the National Foundation of Credit Counselors or the Homeownership Preservation Foundation at its Web site or by phone at 1-888-995-HOPE.
Even if you and your lender can’t see any way to save your home, there are still options available that are less painful than foreclosure — for both parties. If selling is too burdensome, you can simply hand over the keys to the lender by voluntarily transferring the title back to it in one of several different ways.
In a deed-in-lieu-of-foreclosure situation, you would forgo continued ownership in exchange for cancellation of the remaining debt. In a short sale, also known as a short payoff or pre-foreclosure sale, the lender would allow you to sell the place at less than what is owed, and you and the lender would agree to an unsecured repayment plan for the difference