How homeowners can escape a mortgage mess

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

from the August 27, 2007 edition

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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."

 

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