Fend off foreclosure

More than 2 million Americans are now falling behind on their mortgage payments. How they can work with banks to get back on track.

Banks are giving delinquent mortgagees much more leeway than ever before - perhaps by default.

While delinquent mortgage payments have dropped slightly, according to the latest figures released by the Mortgage Bankers Association of America (MBA), foreclosures are still on the rise.

The percentage of loans in foreclosure was 1.18 percent in the fourth quarter of 2002, the latest figure available. That's up from 1.15 percent in the third quarter.

MBA chief economist Doug Duncan is somewhat optimistic that foreclosures have peaked, noting that they usually lag unemployment and delinquencies.

On the latter front, there is a shred of good news. The MBA's National Delinquency Survey for the fourth quarter of 2002 shows 4.53 percent of almost 45 million mortgage loans in the US were at least 30 days late, down from 4.66 percent during the previous three months.

"We are not out of the woods," says Mr. Duncan, who expects delinquencies will continue to fall. "It's heavily dependent on what we see in the economy going ahead."

But with the economy still down, un- employment up, and the percentage of mortgage debt to total debt rising, "the increase in foreclosures is not over yet," says Thomas Hickey, economist for TransUnion, a provider of global business intelligence services in Jackson, Miss.

"The unemployment rate will continue to climb in 2003 and the economic growth rate will be slow until 2004," he adds.

Regardless of economic conditions, lenders are taking clear steps to help borrowers avoid foreclosure. The key, they say, is for consumers to face the issue head-on.

"We just need customers to talk to us, but many people are too embarrassed," says Chuck Maness, senior vice president of National City Home Loan Services in Cleveland. "Our philosophy is to help every borrower to stay in their home.... We make absolutely no money on a foreclosure."

National City Corp. implemented a loss-mitigation program about two years ago, offering consumers a variety of repayment options to avoid foreclosure. Many other lenders, including Freddie Mac, Chase Manhattan, and Wells Fargo, have similar programs.

Among the most common options given to people struggling to meet their house payments:

Repayment plans: These plans often give homeowners additional time to bring an account up to date. For example, if a homeowner loses a job and falls behind on the mortgage before regaining employment, then the bank may arrange for the borrower to send a payment and a half for several months until the loan is current.

Modification plans: These plans are used when a borrower falls behind and cannot make up the back payments. Banks sometimes will add those payments and interest owed to the loan, giving the borrower a fresh start.

Forbearance plans: This option is usually connected with natural disasters. When the house owned by one National City customer flooded, it forced the family into a hotel while repairs were done. This extra expenses prevented the customer from making timely payments. The bank granted forbearance until the insurance company reimbursed the customer for the expenses and the loan was brought current.

Preforeclosure sales This option helps people who can no longer afford their house. The bank allows the customer to sell the house for less than it was worth, and forgives some past-due interest. The amount forgiven varies, but Mr. Maness says it ranges up to 20 percent of interest due.

Whatever the terms, financial experts say proactive consumers find more grace with lenders than those who ignore late notices and avoid phone calls.

"There is leeway with the bank, but most Americans don't know it," says Fred Siegel, founder of the Siegel Group, a real estate development and consulting firm in New Orleans. "Banks are more much more lenient today than they were a decade ago because interest rates are so low."

Experts say the best approach is to be honest with the lender and negotiate a lower interest loan or an extended payment plan. Mercy abounds for borrowers facing a job loss, illness, or other unforeseen circumstances.

Yet there are limits. After homeowners fall three payments behind, banks forward such cases to an attorney. But foreclosure proceedings take up to a year in most states, according to experts, giving customers even more time to work out a repayment plan, save their home, and salvage their credit rating.

"If the bank thinks you are trying, then they will work with you," says Mr. Siegel. who recommends that troubled borrowers consider using nonprofit credit-counseling services to act as a mediator in the foreclosure process. "If they think you are avoiding the issue, then they are going to go on with the foreclosure."

When all else fails, legal experts say, file for bankruptcy.

"You don't want to file bankruptcy unless you have exhausted all the other options, because it stays on your record for years," says attorney Stuart Gordon, chairman of the bankruptcy and insolvency department of Shaw, Licitra, Bohner, Esernio, Schwartz and Pfluger, P.C., in Garden City, N.Y.

"The worst thing people can do is nothing," he adds. "You get legal fees, late fees, default fees, and before you know it, there are so many fees that you can't keep up."

Individuals with a source of income should file Chapter 13 bankruptcy, Mr. Gordon says, enabling them to keep their homes and work out a repayment plan with their creditors.

But experts warn that Chapter 7 bankruptcy is not as viable an option to hold onto a home as once it was. Higher property values have built substantial equity in many homes, giving lenders more to gain from foreclosing than in the past, says John Penberthy, chair of the American Bar Association's Consumer Bankruptcy Subsection.

"With the exception of Florida and Texas, no state exemption statute allows you to keep the house when a Chapter 7 is filed," says Mr. Penberthy. But "if a debtor has enough disposable income to catch the mortgage up within 12 months [since unsecured obligations, like credit-card payments, do not have to be made], a Chapter 7 is viable option to save a home."

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