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Mortgage Lenders Adapt to Softening U.S. Economy


WASHINGTON — The sobering fact about the softening American economy is that it's beginning to spit out real, live victims-many of them homeowners.

Last month alone, American businesses cut more jobs than in any one-month period since the recession of 1991, and 163,000 employees were touched by new layoff announcements-job-loss time bombs set to go off in the months just ahead.

But unlike the last economic down cycle, this time there are far better remedies available to homeowners who lose their jobs, fall behind on mortgage payments, or start sinking toward serious delinquency.

There are even attractive options for would-be home buyers who assume they're locked out of the market because of employment-related credit problems. They're not. The fact is that for homeowners and home buyers alike, 2001 is a whole new ballgame.

Here's why. During the past 10 years, mortgage lenders have become far more sophisticated in dealing with borrowers and loan applicants who have economic battle scars.

In 1991, the typical response to a job loss by mortgage lenders was: "We're truly sorry about your trouble, but if you don't pay the mortgage, we're going to have to take away your house." Today, the predominant response is: "Let's see if we can come up with a way to help you through this rough patch. Let's try to work this out."

The two biggest sources of American home mortgage money-Fannie Mae and Freddie Mac-not only endorse this approach, they require it. Mortgage companies who do business with Fannie and Freddie are expected to work aggressively to avoid foreclosures. The same generally is true for independent lenders who retain and service the mortgages they make. Many now offer flexible programs designed to allow homeowners facing temporary interruptions of income to defer a portion of monthly principal or interest for short periods.

Others-generally smaller, depository institutions-may have no formal programs of forbearance for employment-troubled clients, but will seek to accommodate reasonable requests for limited periods.

"Nobody in his right mind wants your home," says mortgage marketing consultant Allen L. Hardester Jr. of Columbia, Md. "If you get into trouble and contact your lender early in the game, you now have a very good chance" of working out some form of solution to your problem.

Among the most common techniques are repayment plans and loan modifications that see you through your time of stress. For example, say one of the two income-earning spouses in a family loses his or her job. It may be possible to negotiate temporarily lower payments on the mortgage until the spouse locates a new job. The lender frequently will lump the deferred payments onto the principal due on the entire loan-essentially allowing you to finance your arrears over time. Occasionally lenders will even restructure the entire note or reduce the interest rate.

Last year alone, Fannie Mae approved nearly 15,000 custom-crafted repayment plans or loan modifications with delinquent homeowners who needed temporary relief from the burden of their regular payments.

Borrowers should know that "there are ways to assist homeowners when they encounter financial hardships," says Joe Sakole, Fannie Mae's vice president for loss mitigation. "We have the ability to keep people in their homes."

Not all situations lend themselves to home-saving mortgage modifications, of course. Borrowers with no prospects of recovering from their economic reversals may not qualify for temporary assistance. Ultimately the only way they'll avoid foreclosure is by agreeing to a "short sale" or voluntary pre-foreclosure sale of the house, or by simply handing over the deed to the lender.

But such cases now appear to be in the minority. Fannie Mae last year modified or used customized repayment plans in 53% of all serious delinquencies. In 1997, only one-third of Fannie Mae borrowers with severe financial problems received such help.

More good news: The market has also changed over the past few years for home buyers with spotty credit records. Both Fannie Mae and Freddie Mac now finance buyers they would have rejected in 1997.

Freddie Mac, for instance, funded $18.6 billion worth of home mortgages last year for borrowers with subpar credit. Fannie Mae actively promotes its "timely payment rewards" program, which provides mortgages to borrowers who have prior credit problems but good prospects for the future. Both companies offer relatively low interest rates, plus the opportunity to cut the rate by one percentage point after two years of on-time payments.

The bottom line: Tough economic times and job losses no longer need to mean the loss of your home. Talk to your lender or loan servicer as soon as you see storm clouds forming, to find out whether you've got a silver lining.


Distributed by the Washington Post Writers Group.

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