How homeowners can escape a mortgage mess
What to do if payments on your adjustable-rate mortgage are about to go up.
Stress in the nation's mortgage industry is putting a financial squeeze on home buyers and homeowners alike.Skip to next paragraph
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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.
With October identified as a peak month for such scheduled resets, can this group of homeowners escape from this mortgage mess?
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:
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.