How homeowners can escape a mortgage mess

What to do if payments on your adjustable-rate mortgage are about to go up.

By , Staff writer of The Christian Science Monitor

Stress in the nation's mortgage industry is putting a financial squeeze on home buyers and homeowners alike.

Buyers are finding it harder to obtain home loans as lenders tighten their credit standards or even go out of business.

Homeowners with adjustable-rate mortgages (ARMs) face a double-whammy. House prices are falling even as their monthly home payments adjust upward in a big way. So when ARMs reset, many may find they can neither make their payments nor sell the house for enough money to cover the loan.

Recommended: Default

With October identified as a peak month for such scheduled resets, can this group of homeowners escape from this mortgage mess?

Perhaps.

Today's credit environment certainly isn't as easy as it was a few years ago, when lenders often made loans that put themselves and home-buyers at higher risk. Back then, as home prices rose, so did the popularity of loans with "teaser" interest rates that only lasted a couple of years. Subprime lending soared, as lenders issued riskier loans, ignoring the elevated danger of default.

Now homeowners faced with the prospect of home loans resetting sharply higher are seeking solutions. Often what's needed is patience, persistence, and a willingness to seek help.

Consider the recent experience of one Germantown, Md., couple who nearly lost their home. Vaughn and Candice bought a large brick-front colonial five years ago. A couple of years later, they refinanced their mortgage, allowing them to tap their home's equity to help pay college bills for two of their children. Their monthly mortgage payment was $4,000 a month, and everything seemed to be going well.

"We were fine," says Vaughn, who asked that his family's last name not be used in this story to protect their financial privacy.

But suddenly, a cosmetics business they ran began to dry up after one of the major stores at the mall where they operated shut down. They plowed their own savings into the business to try to keep it going. Despite Candice's income as a full-time engineer, they soon fell behind on their house payments. Vaughn's efforts to renegotiate with the loan company only resulted in an offer that he couldn't meet: $20,000 in cash by July.

The last straw: The interest on their ARM was poised to reset from 6.7 percent to about 9 percent as of that month.

By May, Vaughn was desperate, believing that a foreclosure notice could come any week. "I was asking God to show me the way," he says.

Through a news article, he learned about a nonprofit organization in Chicago that had partnerships with several loan-service companies, including his own, to help prevent foreclosures.

He contacted the group, the National Information and Training Center (NTIC), which cut a deal with the lender. Vaughn and Candice won a loan modification that shifts them from an adjustable to a fixed-rate loan. They'll owe $4,200 a month, starting next week, but that should work for them now that they've closed the money-losing cosmetics business. The deal also helps their creditor avoid the costs of foreclosing and selling the house.

Not every strapped homeowner is having such good fortune. But the financial rescue of this Maryland couple can happen for others, too. "I'm living proof," Vaughn says.

Housing experts say people faced with possible foreclosure, or a big upward reset in what they owe on an ARM, might consider this advice:

Know the value of your home. Selling probably isn't your first choice, but it's important to know if the house could be sold for enough to pay off the loan, plus closing costs. Ask a real estate agent for a free estimate, while mentioning that you have no immediate plans to put the house on the market. Also check out www.zillow.com, an online real estate information website that provides home "Zestimates."

Consider refinancing. If your credit is poor, this may not be possible or will carry big fees, but if a deal sounds good, get an estimate in writing. You can consider whether the offer is worthwhile by using an online calculator such as www.fincalc.com (click on "consumerCalcs," then look under "home and mortgage").

Talk to your lender. Troubled home­owners may want to run and hide, and lenders may seem unresponsive, but "the longer you wait, the fewer options you have for a workout," says Ren Essene of Harvard University's Joint Center for Housing Studies. Keep records of when you called and whom you talked to.

Seek a loan-modification deal. If you're heading into default, ask to speak with someone in your mortgage lender's "loss mitigation" department. This individual will generally have the authority to set new terms for your loan to avoid foreclosure. "Lenders will often ask for good-faith money toward a modification," so hoard cash if you can, says Michele Rodriguez Taylor of NTIC.

Get help. Some nonprofit groups can serve as a go-between with the lender or can offer advice about your options. A nationwide HOPE Hotline (888-995-4673), run by the Homeownership Preservation Foundation, offers counseling. Through the group Neighborworks, it provides referrals to local organizations that can act on your behalf. Some states have set up rescue funds for homeowners. The federal Department of Housing and Urban Development offers links to community groups, among other aids, on its website (www.hud.gov).

Beware of 'rescue' scams. If someone calls out of the blue and offers to repay your loan if you sign the deed to them or asks for lots of money to help you stay in your home, hang up.

Selling may be best. "Consumers will do everything to keep their home, even if it's irrational," Ms. Essene says. Some refinance multiple times, draining out their equity in the home, and still can't afford to keep it. They would have been better off selling sooner, she says.

Choose the lesser of evils. Foreclosure is generally the worst outcome for home­owners, blackening their creditworthiness for years to come. For families on the brink, some alternatives include a "deed in lieu of foreclosure" transfer of ownership to the lender. In other cases, the lender may let you sell the home for a value that won't fully pay off the loan.

Amid these troubles, it's important to keep the challenge in perspective. The current housing market, financial experts say, is tough for just about everyone.

"It's become tighter across the board" for borrowers, says Celia Chen, who tracks housing issues at Moody's Economy.com in West Chester, Pa. "There are few subprime loans being written. [But] for someone who has built up equity and is a prime borrower, they'll still be able to refinance."

Tips for mortgage shoppers

If you’re looking to buy a home, loans are available – but new terms and conditions apply. Down payments are in. Mortgage approvals without documentation are out. Despite the downward spiral of lenders who financed high-risk borrowers, there hasn’t been a freeze-up for prime “conforming” loans (less than $417,000), says Holden Lewis, a senior reporter at Bankrate.com, which tracks credit markets. But jumbo loans (over $417,000) now carry higher interest rates than they did a month ago, and lenders will demand down payments of 5 percent or more, he says.

Financial experts offer this advice:
• Educate yourself. Community action groups often provide free buyer-education seminars. Visit websites of government housing agencies, especially www.hud.gov, for guidance.

• Patch up any credit problems. For people with credit scores below 620, “there are very few options,” says Celia Chen of Moody’s Economy.com.

• Shop around. This is especially true now. If an online mortgage lender can’t help you, maybe your local bank can.

• Think realistically. With home prices under downward pressure, don’t count on rising values to outpace your interest costs.

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