WASHINGTON — Thousands of financially stressed homeowners who are seriously delinquent on their home mortgages and unable to refinance could be in for good news:
They may be able to modify the terms of their existing mortgage, cut their monthly payments and avoid the trauma of foreclosure.
Under a new program unwrapped earlier this year by the Federal Home Loan Mortgage Corp. (Freddie Mac), qualifying delinquent borrowers across the country will get a fresh shot at keeping their homes. Freddie Mac is one of the two largest investors in American home loans, and buys billions of dollars of new mortgages annually.
The new initiative works like this: Say you lost your job in mid-1993 after years of steady employment and excellent credit. You recently managed to find a new job, but at significantly lower pay. Squeezed by bills that never stop, you've fallen behind on virtually all your installment debts--and are now four months delinquent on your home loan.
Under typical circumstances, your lender--or the mortgage company servicing your loan--would be banging on the door with dire warnings about your impending foreclosure. But if your mortgage happened to be owned in whole or part by Freddie Mac, and your situation qualified under the new program, you could literally rewrite your loan and stop the clock.
You might be able to drop your interest rate from its current level by two, three or more percentage points. You might be able to roll up the interest payments you've missed and lump them onto your principal debt--extending the term of the overall mortgage for a short period.
The specific details of the modification would be up to you and your mortgage servicer to work out. But the bottom line would be the same: You'd continue to own and live in your home, and your payments would better fit your current financial circumstances.
Richard D. Bryan, the Freddie Mac executive vice president overseeing the new program, says the idea is "to offer a new tool" to consumers whose delinquent payments not only expose them to foreclosure, but rule out their qualifying for any form of refinancing.
Part of the tragedy for large numbers of families facing income squeezes, according to Bryan, is that refinancing their mortgages by two or three percentage points would solve part of their problem through lower monthly payments. But almost no lender will refinance a borrower who's missed three, four or more months of mortgage payments. Why lend new money to people who don't make monthly payments?
Freddie Mac's new program won't provide refinancing either, but instead will recast some of the basic terms of a consumer's existing, delinquent loan. Bryan emphasizes that it won't be for everyone experiencing financial problems. For starters, you've got to fit the following mold:
--Your loan has to be a conventional (non-FHA or VA) first mortgage at least 1 year old that's owned or contained in a mortgage security backed by Freddie Mac. The best way to find out is to contact your mortgage servicer--the company to which you send (or used to send) your monthly payment--and ask.
--You have to be seriously delinquent--120 days behind or more. If you're 90 days delinquent, your loan servicer might contact you to propose the new modification plan.
--Your mortgage has to have a loan-to-value (LTV) of 80% or more. That means your equity stake in the home has to be less than 20%. Bryan explained that if you have a bigger equity cushion, you may be able to qualify for a regular refinancing. The new program, by contrast, is restricted to the worst-hit of the walking wounded--those cut off from refinancing relief.
--You have to have some income--enough, in fact, that your monthly debts are no higher than 42% of your stable monthly income. You may not be involved in bankruptcy proceedings at any stage.
Once your loan servicer agrees that you might qualify, you can expect the modification process to take 30 to 45 days. During this time the servicer will run a fresh credit check on you, do a title search on the property and get either a standard real estate appraisal or what's called a "BPO"--a realty broker's "price opinion" on what the house is worth in the marketplace.
The cost of these services will have to be borne by you--not rolled into the revised loan amount or terms--or paid for by the mortgage insurance company covering your loan. Private mortgage insurers "are very enthusiastic" about Freddie Mac's program, according to Bryan, even if it costs them a little money to assist with the modification process. Far better to pay a few hundred dollars for title and appraisal work, he said, than to pay out thousands on a foreclosure.
What kind of mortgage rate might you expect as a participant in the program? Say your current delinquent loan is at 10% interest and you qualify on all key criteria. You could walk away with an 8.125% restructured, 30-year loan. Sure that's about a percentage point higher than a borrower with a squeaky-clean credit history could get.
But by definition, you're no longer squeaky-clean. Compare it realistically with your other alternatives.